NEWS FLASH – Upstream Liability of Holding Companies and Franchisors for Exploited Workers

12 Sep 2017

On 5 September 2017 the federal government made historic changes to the Fair Work Act 2009 (Cth) (FW Act) to introduce upstream liability for holding companies and franchisors.

The changes form part of the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill). They take effect six weeks from the date of royal assent, and are likely to be in place by November 2017.

Under the changes, holding companies and franchisors are responsible for certain contraventions of the FW Act by their subsidiaries and franchisees where they knew or ought reasonably to have known of the contraventions and failed to take reasonable steps to prevent them. This means, for example, that if an employee has a claim for underpayment of wages, the employee, the employee's union or the Fair Work Ombudsman (FWO) may consider joining a holding company or franchisor to the claim, or even bypass the employer altogether and bring a claim solely against the holding company or franchisor.

The changes have occurred because some holding companies and franchisors have established subsidiaries in their corporate structure and franchises that operate on a business model of underpaying workers. However, the changes will impact all holding companies, as well as franchisors that have significant influence or control over their networks. The government has made it clear that turning a blind eye to exploitation of workers is not an option under the new provisions.

The New Law

Upstream liability will only apply to certain provisions of the FW Act that protect employees from exploitation, most relevantly:

  • The National Employment Standards,
  • Minimum wages, awards and enterprise agreements,
  • Unreasonable requirements on employees to spend or pay certain amounts,
  • Sham independent contracting, and
  • Requirements to keep employee records for 7 years and issue pay-slips.

Under the new provisions, the holding company/franchisor is liable for a contravention committed by a franchisee/subsidiary if the holding company/franchisor (or an officer) knew or could reasonably be expected to have known that the contravention would occur. Alternatively, the holding company/franchisor is liable if, at the time of the contravention, the holding company/franchisor (or an officer) knew or could reasonably be expected to have known that a contravention by the subsidiary/franchisee of the same or a similar character was likely to occur. For example, if a holding company is aware of a series of complaints in its group about underpayments this would trigger its potential liability under the new provisions.

For franchisors, the reach of the new provisions is limited by the following factors that are elaborated upon in the Explanatory Memorandum for the Bill:

  • the FW Act does not extend to impose franchisor obligations on corporations operating completely outside Australia – that is companies that do not have any operations in Australia and have simply entered into a master franchisor relationship with an Australian company (even if the Australian company is a subsidiary of the foreign company),
  • the new provisions only apply to franchisors (or sub-franchisors) that have a significant degree of influence and control over the franchisee entity's affairs (interestingly, there is no such exception for holding companies, which, by definition have control over the affairs of their subsidiaries), and
  • the business must be widely considered to be a 'franchise business' and appropriately associated by branding, as distinct from other forms of arrangements such as distribution agreements and joint venture marketing.

It is a defence to a claim under the upstream liability laws if, at the time of the contravention, the holding company/franchisor had taken "reasonable steps" to prevent a contravention by the subsidiary/franchisee of the same or a similar character.

Implications

At a minimum all holding companies and franchisors should be considering whether they have an exposure under the new provisions and what "reasonable steps" they should take to mitigate any risk.

It was raised in second reading speeches for the Bill that the narrow focus on the franchisor/franchisee and holding company relationship might act as an incentive for companies to move out of those models and into other commercial relationships not covered by the new provisions, or, in the case of franchisors, to arrange their relationship so that they are using a franchise model which allows them to argue that they do not have a significant degree of influence or control. However, to some extent the laws merely reinforce the exposure that holding companies and franchisors already have under the accessorial liability provisions of the FW Act. Under those provisions a person commits a contravention of the FW Act if they are in any way, by act or omission, and whether directly or indirectly, knowingly concerned in the contravention. The accessorial liability provisions have been either used in, or potentially been a factor in, recent high profile matters including:

  • In 2012, the FWO commenced break-through proceedings against Coles Supermarkets over alleged underpayment of trolley collection contractors. In 2014 these proceedings ended with Coles entering into a voluntary enforceable undertaking until the end of 2018. As part of the undertaking Coles paid approximately $220,000 to ten trolley collectors, set up a reserve fund of $500,000 for distribution to other underpaid collectors and committed to annual audits of at least 20% of the sub-contractors of its trolley contractor.
  • On 2 November 2016, the FWO successfully prosecuted YBF Australia Pty Ltd, the head Australian company and master franchisor of Yogurberry in Australia, for its role in underpaying four workers employed by one of its subsidiaries.
  • On 7 December 2016, 7-Eleven Stores Pty Ltd, the company that develops and franchises 7-Eleven stores in Australia under licence from the US-based 7-Eleven Inc., entered into a three year compliance deed with the FWO. This followed a FWO inquiry into 7-Eleven commenced in 2014, and voluntary action taken by 7-Eleven before the inquiry was complete. The voluntary action included 7-Eleven commissioning its own report and introducing a wage repayment program that, by 2016, had approved payments of almost $57 million to more than 1,400 underpaid workers.
  • On 1 May 2017 Caltex Australia Limited announced a $20 million assistance fund for franchisee employees who have not been paid their full entitlements by Caltex franchisees.

How Kemp Strang can Assist

If you are a holding company or franchisor, beware – you could be liable for a contravention by your subsidiaries or franchisees to properly pay employees or other contraventions of the FW Act. To mitigate the risk of a claim it is important to take reasonable steps to protect workers within your group or franchise.

Kemp Strang can assist you by providing advice tailored to your company on measures to mitigate any risk.

For further information please contact Kemp Strang Partner, oshryi [at] kempstrang [dot] com [dot] au (Ivan Oshry) or Executive Counsel, trembathd [at] kempstrang [dot] com [dot] au (Donna Trembath).

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