5 tips for minimising risk in your franchise network

In 2017, the Federal Government passed the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 to protect vulnerable workers from underpayment and cashback schemes.

Effectively, the new regime made franchisors, licensors and other holding companies responsible for the treatment of employees that are not their own. Where serious contraventions have occurred, penalties have increased tenfold and liability for the serious contravention can be attributed to the franchisor.

So, what can franchisors do to reduce danger? Employment law specialists, HR Legal reveal the top five tips for minimising risk when it comes to non-compliance issues within their network.

1. Know When You Could Be At Risk

As a franchisor, the first step in minimising risk is to understand whether you may be held responsible for the actions of your franchisees under the new laws.

Franchisors can be held responsible for the breaches of workplace laws by their franchisees if:

  • There is a franchise arrangement in place where the franchisor allows another person or business to use its brand, trademark or reputation to run a business
  • The franchisee uses the intellectual property of the franchise as the key part business
  • The franchisor has significant control or influence over the franchisee’s business.

If all three of these factors exist, this will create a ‘franchising arrangement’ for the purposes of the new laws, even if the arrangement is not otherwise characterised that way.

2. Know The Key Risks

Once a ‘franchising arrangement’ has been established, a franchisor’s responsibility for the conduct of its franchisees is broad. Under the new regime, franchisors can be held responsible if they knew, or could reasonably be expected to have known, about breaches and that they failed to take reasonable steps to prevent them. The new regime focuses on:

  • payment of minimum entitlements under the National Employment Standards and any applicable industrial instrument/s
  • methods and frequency of payment
  • pay slips and record keeping
  • sham contracting.

While this list includes a number of breaches for which a franchisor can be held responsible, some breaches of workplace laws are excluded – such as if a franchisee unfairly dismisses an employee, or if they treat an employee adversely in contravention of general protections provisions.

3. Respond To Potential Breaches Quickly

To avoid being held liable for breaches and underpayments, franchisors must take reasonable steps to have franchisees rectify any underpayments or other breaches.

If a franchisor identifies an underpayment or other breach of workplace laws by a franchisee, or suspects there may be non-compliance issues, the franchisor should act quickly to ensure that issues are rectified, and actions are taken in response if necessary.

4. Understanding How To Reduce Risks

Wilful ignorance is no defence to liability under the new regime. In order to reduce the risk of being held liable for breaches, franchisors should be able to demonstrate that they have taken reasonable steps to prevent contraventions.

What constitutes “reasonable steps” will depend on the circumstances of the franchise at the time, but may include:

  • Setting expectations about compliance
  • Educating franchisees about their obligations
  • Monitoring compliance through audits.

5. Create a Framework that Promotes Compliance

Like most things “prevention is better than the cure”. Franchisors should take pro-active steps to help their franchisees ensure compliance with workplace laws and to promote compliance within its network.

Some of these steps may include:

  • Provide education to franchisees on compliance with workplace laws
  • Present franchisees with compliant template employment contracts and policies they can use in their businesses
  • Provide annual updates to franchisees on minimum wages and conditions
  • Conduct random spot audits of wage compliance within the franchisee network
  • Provide helplines for both franchisees and their staff to address concerns
  • Deal with non-compliance promptly.

These types of steps not only will ensure compliance with the new laws but also protect the franchise brand.

Franchisors are encouraged to seek legal assistance to ascertain whether these laws apply to their franchise arrangement, and if so, what reasonable steps can be taken to ensure their networks are compliant.