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Subway is the latest in a group of large franchisors to attract the attention of the Fair Work Ombudsman (FWO). The FWO is now investigating potential widespread underpayment of employees at franchised Subway shops. The investigation follows a string of major franchises (such as 7-Eleven, Dominos and Michael Hill) coming into the spotlight for franchisee non-compliance in relation to workplace laws. 

Subway’s head office has since released statements emphasising how seriously it takes underpayment of staff. However, there are lessons we can learn from this example. Franchisee compliance is now even more important for franchisors to understand, as the Protecting Vulnerable Workers laws introduced in 2017 mean that you may be directly responsible if your franchisees underpay employees. This article will explain what you should be doing as a franchisor to ensure that your franchisees are compliant.

What Are ‘Reasonable Steps’?

As a franchisor, you may be held responsible if you knew about (or ought to have known about) your franchisees’ behaviour. If an issue arises, the court will determine whether you should have been aware of it based on what ‘reasonable steps’ you could have taken to monitor your franchisees.

Importantly, you will not be held responsible if the court decides that you took reasonable steps to monitor your franchisees. Therefore, you should carefully consider what might be considered ‘reasonable steps’ within your franchise system. This will depend on the nature and scale of your franchise.  

What Do the Protecting Vulnerable Workers Laws Say?

The Protecting Vulnerable Workers laws include the reasonable steps that franchisors should take to ensure franchisees are complying with workplace laws. You should use these laws as guidelines for compliance.

1. Ensure Strict Compliance With Workplace Laws

Your franchise agreement and manual should require franchisees to comply with workplace laws.

For example, you may wish to consider distributing a set of terms that a franchisee must include into any employment contract that they enter into with staff. 

Also, if an enterprise agreement is in place which covers your franchisees’ staff, your franchise agreement and manual should refer to this agreement. 

2. Provide Franchisees With Useful Materials

Unfortunately, provisions in your documents will not be enough to avoid responsibility if a franchisee fails to comply with workplace laws. Therefore, you should also actively help your franchisees to comply. 

For example, you could provide your franchisees with copies of:

  • the FWO’s free Fair Work Handbook (as suggested by the parliament); 
  • an outline of superannuation requirements and processes; 
  • a ‘checklist’ of steps a franchisee should be taking on a periodic basis; and
  • suggested accounting software which facilitates payment according to mandated pay rates.

3. Encourage Franchisees To Cooperate With FWO Audits

If one of your franchisees attracts the FWO’s attention for any reason, encourage them to cooperate fully. Sometimes, an affected employee or a worker’s advocacy organisation will report non-compliance issues directly to the FWO. In this case, it may be entirely reasonable that you were not aware of the issues. Encouraging your franchisees to cooperate can show that you are taking reasonable steps to ensure compliance.

You may also wish to introduce a policy requiring franchisees to inform you if they are contacted by the FWO about a potential contravention. 

4. Establish a Contact Number For Employees

You should establish a contact number for your franchisees’ employees to report any potential underpayment directly to you. By doing so, you ensure that you are not relying on franchisees to alert you to any possible non-compliance. 

For example, some of the criticism levelled against Subway was that the head office appeared to be turning a blind eye to non-compliance in their network. Setting up a direct communication channel with franchisee staff can prevent this. 

You should also require your franchisees to inform their staff of any contact number you establish for this purpose. 

5. Periodically Audit Franchisees’ Pay Records

Finally, conducting audits of time sheets, pay slips and other records is one of the best ways to protect yourself under the Protecting Vulnerable Workers laws. Although auditing records alone may not protect you completely as the franchisor, it will go a long way when a court must considers whether you reasonably ought to have known about non-compliance. Depending on the size of your franchise network, you may choose to limit your audit to a:

  • sample of franchisees chosen randomly; or
  • rolling basis (e.g. 20% of the franchisee base is audited every quarter). 

Key Takeaways

The FWO is investigating instances of systemic underpayment of employees within large franchise systems. Therefore, it is important for franchisors to ensure that they are taking ‘reasonable steps’ to monitor instances of underpayment within their system. For example, these steps might include:

  • auditing pay records; and 
  • establishing a means for franchisee employees to report underpayment to you directly.

For more guidance on these issues or to assist with implementing these recommendations, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.


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