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Franchising in Australia: 7-Eleven off the hook for franchisee wage violations....for now

The extent to which a franchisor can be held jointly liable for employment law and wage violations by its franchise operators is probably the biggest issue facing the franchise industry in the US - epitomized by the ongoing dispute between McDonald's and the National Labor Relations Board. At the recent IFA conference in Washington, experts from around the world discussed whether this issue is likely to occur in other jurisdictions. This blog looks at a recent case involving 7-Eleven in Australia, which demonstrates that this issue is not isolated to the US.

An Australian government inquiry report published earlier this year recommended review of the Australian Franchising Code "… with a view to assessing the respective responsibilities of franchisors and franchisees regarding compliance with workplace law and whether there is scope to impose some degree of responsibility on a franchisor and the merits or otherwise of so doing."

The publication of this Senate Inquiry Report entitled A National Disgrace: The Exploitation of Temporary Work Visa Holders was soon followed by the publication of the Australian Fair Work Ombudsman’s (FWO) report of its inquiry into 7-Eleven. This inquiry was in response to complaints of underpayment of wages by 7-Eleven franchisees. The FWO inquiry ultimately found that franchisees had paid employees below minimum award wages and had concealed this conduct by making false time and wages payment entries into employee management systems. Other franchisees had required repayment in cash of wages paid resulting in an overall underpayment.

Although the FWO was critical of the 7-Eleven franchisor, including of its compliance monitoring and auditing and franchisee employee complaint handling procedures, there was insufficient evidence to find the franchisor liable for the contraventions by its franchisees.

The Australian Fair Work Act provides for accessorial liability of a person who is "knowingly involved in" a contravention of a civil penalty provision (eg underpayment of award wages). The FWO could not show 7-Eleven franchisor was involved in and had the requisite knowledge of the facts of the contraventions by its franchisees.  Accordingly, it was not liable under the Act.  

In the lead up to Australia’s federal election, the Liberal Government announced that if re-elected it will introduce stronger protections under the Fair Work Act for vulnerable workers including introducing "…new offence provisions that capture franchisors and parent companies who fail to deal with exploitation by their franchisees. The Fair Work Act will be amended to make franchisors and parent companies liable for breaches of the Act by their franchisees or subsidiaries in situations where they should reasonably have been aware of the breaches and could reasonably have taken action to prevent them from occurring. Franchisors who have taken reasonable steps to educate their franchisees, who are separate and independent businesses, about their workplace obligations and have assurance processes in place, will not be captured by these new provisions."

This proposed new test for liability involving constructive awareness of breaches in circumstances in which the franchisor could reasonably have taken action to prevent these breaches represents a lower bar for franchisor liability relative to the present requirement to be knowingly involved in a contravention. Contrary to the recommendations in the Senate Inquiry Report it appears the intention is to make any changes to the Fair Work Act rather than conducting a further review of the Franchising Code.

The opposition Labour party’s policy focusses on increasing penalties for employers rather than attempting to extend liability to franchisors and parent companies.

Depending on the outcome of the election and any legislative reform that follows franchisors should consider the following:

  • Review of their policies and procedures for franchisee training and operations and monitoring in relation to compliance with workplace laws.
  • Their response to reports of franchisee non-compliance with workplace laws.
  • Inclusion or review of provisions within franchise agreements relating to compliance with workplace laws

From an English law perspective, there has been no direct clarification in the English courts regarding the extent to which a franchisor can be vicariously liable for the acts or omission of its franchisees. In broad terms, only an employer can be held liable for the acts or omissions of its employees and such a liability will not exist in an equivalent independent contracting relationship.

The English courts have considered the nature of the relationship between franchisor and franchisee when addressing the enforceability of restrictive covenants. The common approach (following cases such as Office Overload v Gunn and Dyno-Rod v Reeve) is that the franchisor/franchisee relationship is more akin to that between a vendor and purchaser than an employer / employee and, for that reason, the courts have enforced restrictive covenants in franchise cases which would be far too onerous to be enforceable against an employee. However, this issue does depend on the facts of the individual case as was reinforced by the first instance decision in Fleet Mobile Tyres v Stone and Another in which the Judge said that there were certain aspects in which the parties' relationship was not so completely kept at arm's length as it would be in the case of vendor and purchaser.

It therefore remains best practice for franchisors to regularly review the level of control they have over their franchisees and to ensure that adequate processes are put in place to ensure comprehensive training and to continuously monitor compliance.

With thanks to Iain Irvine from Kelly Hazell Quill in Australia.

 

 

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