The introduction of a new Occupational Health and Safety Act in Victoria means that franchisors now risk being prosecuted for deaths and injuries which occur on premises operated by their franchisees.
The new Act, which brings Victoria into line with New South Wales, came into force on 1 July 2006. Franchisors are caught by the operation of section 26 of the Act which required that a person who manages or controls a workplace - to any extent - must ensure 'so far as is reasonably practicable' that it is safe and poses no risk to health. This liability extends not only to the welfare of people employed on-site but also to customers, service contractors and others who enter the workplace.
Prior to the change being introduced, liability for workplace safety rested primarily with franchisees who occupied the premises in which their employees worked.
Now, franchisors in Victoria who fail to provide a safe environment in a workplace that they manage or control face a fine of $920,250. Furthermore, directors and other employees who have the capacity to make decisions affecting the franchisor's financial status can be fined $184,050.
Although it is unlikely that a franchisor will be the first or only party that Worksafe prosecutes over a death or injury in premises occupied by a franchisee, the risk is real and needs to be addressed. Not only do franchisors need to identify and, where possible, limit their liabilities under the Act but they need to look at their corporate structures to ensure that the intellectual property and assets are properly protected. Advice regarding this issue may be sought from a
franchise lawyer.
Compounding the risk facing franchisors in their capacity as managers or controllers of workplaces is the fact that the Act includes a new offence - that of recklessly engaging in conduct which places a person in a workplace in danger of serious injury. This offence attracts a further penalty of up to five years' jail.
Franchisors should also be aware that if they are not prosecuted under Section 26, there are four other sections of the Act which expose them to liability:
- Sections 21 and 22 (duties of employers to employees)
- Section 23 (duties of employers to other person) and
- Section 24 (duties of self-employed persons to other persons).
Case Law
Given that the new law has not been in force long enough to have resulted in any prosecutions, Victorians must look to NSW case law for examples of how the 'manage or control' provisions operate. Section 26 of the Victorian OHS Act is worded similarly to its Section 10 counterpart in NSW.
The leading case in NSW is WorkCover Authority of New South Wales v McDonald's Australia Limited and Another (McDonald's (Properties) Australia Pty Limited). This decision was handed down by the NSW Industrial Relations Commission in February 2000.
The first defendant - McDonald's Australia Limited - coordinates and operates McDonald's Family Restaurants throughout Australia by means of licence arrangements. It had a licence agreement with a franchisee - Lyndhurst Trading Co. Pty Ltd - which operated a McDonald's Family Restaurant in Wollongong.
The second defendant - McDonald's Properties - is a wholly owned subsidiary of McDonald's Australia and registered proprietor of the land on which the Wollongong restaurant was located, also owned the buildings which were leased to the franchisee.
In March 1996, once of the franchisee's employees - 19 year old Michael Johnston - was electrocuted when he touched an exposed inner core of an electrical cable connected to high a voltage 'clamshell' grill which he was cleaning in the restaurant's kitchen.
McDonald's Australia was prosecuted in relation to the employee's death on the basis that it had some level of control over the plant and in particular the kitchen equipment, in that it had failed to ensure that the equipment was safe. The McDonald's system prescribed the uniform use of equipment as part of its franchise system, which was the responsibility of the franchisor under the licence agreement. The licence required the franchisee to install the clamshell grill and to operate and maintain the grill in accordance with the franchisor's procedures.
McDonald's Properties was prosecuted on the basis that it too had some level of control over the premises - particularly in relation to design, layout and specifications - and it had failed to ensure the premises were safe. The premises were found to be defective in that the position of outlets and switchboards in the restaurant required the clamshell grill to be moved away from the wall prior to activating the isolation switch. Charges were also brought against Lyndhurst (the franchisee) and one of its principals, and the company which installed and commissioned the clamshell grill and provided the franchisee's staff with initial training. Lyndhurst pleaded guilty to failing to provide a safe system of work to the deceased employee. WorkCover subsequently decided not to press charges against the suppliers of the grill.
McDonald's Australia advanced several arguments in its defence including that the franchisee failed to adhere to the McDonald's system of instruction and maintenance; that McDonald's Australia did not have control over the independent contractors supplying or installing the grill; and finally that the risk of injury at the Wollongong site was not easily detected by the franchisor.
The Commission, in court sessions, accepted that Johnston was electrocuted because the power cable to the grill had become worn through contact with the kitchen's abrasive floor. The franchisor's procedures for maintenance and cleaning of the grill were found to be defective. After taking into account that both defendants had pleaded guilty, had subsequently cooperated with WorkCover, had shown contrition and had rectified the safety deficiencies that the death had highlighted, it fined them $120,000 and $150,000 respectively. In both instances the maximum penalty that could have been imposed was $500,000. Under legislation recently introduced in New South Wales, the maximum penalty is now $1.6 million.
In response to the defendants' claim that other parties had also contributed to Johnston's death, the court said that to embark on 'an inquiry as to whether prosecutions should have been commenced or continued … would (be) … tantamount to conducting a trial of (those) other entities in their absence. It would require making 'unqualified adverse findings concerning (a party) which had no opportunity to answer the allegations made against it'.
The Commission's Vice-President, Justice Walton, said Johnston's death stemmed from McDonald's failure to:
- Ensure that staff disconnected the grill from the power source before cleaning
- Design the premises in such a way that the power could be disconnected without the grill first having to be moved, and
- Provide cleaning instructions that were not defective.
His Honour said that the licence agreement and lease 'conferred upon both defendants the power to direct and control corrective action' to ensure the safety of the grill. He said that each defendant had 'exercised that control in a number of material ways'. Whilst they contracted with various companies to provide services to the franchisee, they 'nonetheless retained a significant role through the instigation, monitoring and evaluation of programs relating to the installation and maintenance of equipment'. They were not '… entirely dependent upon (the licensed contractor who installed the clam grill) and the (manufacturer's agent who supplied the power cable) in relation to the safe installation and maintenance of the equipment used in their restaurants'.
His Honour said that the risk of the power cable becoming worn and unsafe was 'reasonably foreseeable and avoidable by simple remedial measures'. The proper test of foreseeability in these circumstances, he said, was not 'whether a lawyer or engineer could conceivably have foreseen the risk which existed but whether or not the ordinary jury person could have done so'. The risk of someone being electrocuted if they failed to cut the power supply before attempting to move or clean the grill was also foreseeable.
Conclusion This NSW case highlights the occupational health and safety liabilities now imposed on franchisors in Victoria. This liability stems directly from the management and control, however limited, that franchisors exercise over franchisees. The duty to provide a safe workplace is non-delegable and cannot be 'outsourced' to a franchisee or independent contractor. In the McDonald's case, the company mounted an impressive and presumably very expensive defense which was not enough to avoid prosecution.
The challenge for franchisors in Victoria's new legislative environment is to maximise their focus on safety and try to minimise their exposure. Given this, franchisors must undertake an urgent review of their agreements and franchise systems to ensure that all aspects of those systems are safe and without risks to health. As franchisors will be held responsible for defective equipment, layout of premises or maintenance procedures, they cannot afford the risk of simply leaving it to their franchisees to introduce measures to ensure compliance with the new Act.
Franchisors should also take immediate steps to review corporate structures with a view to protecting company assets. One consideration is whether their companies should be compartmentalised. Intellectual property and other major assets could be put into a separate holding company and then be licensed across to the franchising company so that it becomes nothing more than a conduit for royalties. If the worst happens, the asset holding company may be protected from an adverse outcome of a claim or prosecution.
Franchisors and master franchisors should also be aware of their personal liability under the new Act. This may require individual directors and company officers to put in place effective strategies to protect their own personal assets to ensure that the impact of a prosecution is minimised.
This article appears courtesy of
Mason Sier Turnbull.
4-Sep-2007