The Turnbull government has introduced tough, potentially game-changing laws that may see the end of franchising in Australia as we know it.
The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill) is in response to grievous acts of exploitation by employers, which was ignored by the franchisor, more specifically the 7-Eleven franchise.
‘The model will only work if they underpay employees’
Alleged 7-Eleven underpayment undermines guest worker regulations, says former ACCC chairman Allan Fels.
Last week the bill was referred to the Senate Education and Employment Legislation Committee for review. The sector’s peak body the Franchise Council of Australia and many franchisors put forward their submissions to the committee.
It is the bill’s proposed legislative amendments that have thrown the $146 billion industry into chaos as franchisors and franchisees ponder if the franchise industry is being read its last rites.
There are four key amendments that will affect the franchising sector.
First, amendments to s558A creates a broader, and arguably unfair, definition of “franchisor”. This has the scope to inadvertently capture businesses that are not franchises.
Second, establishing the connection between a franchisee and franchisor and their “significant degree of control” casts a wider net than is necessary. Control should reflect the issue of “employment” and not the general affairs of a franchisee.
Concerns exist that, unlike the recently publicised case of Yogurberry or the Fair Work Ombudsman’s inquiry into the systems of 7-Eleven, not all franchisors maintain the same level of control over the financial and operational systems of their franchisees.
Employment Minister Michaelia Cash is pushing through changes to franchising. Photo: Alex Ellinghausen
The introduction of the proposed legislation may drive a wedge between franchisor and franchisee relationships as fingers are pointed over increased costs associated with the compliance of a franchise system.
Third, the word “significant” referred to above is ambiguous. This could mean a small franchisor that provides template employment contracts and template procedures is liable for deliberate and malicious acts of a franchisee.
7-Eleven was caught underpaying workers.
Finally, the phrase “could reasonably be expected to have known” in changes to s328 creates a liability that is too uncertain in the context of a typical franchisee arrangement where there is constant communication between the franchisor and franchisee.
Essentially this phrase will be subjected to a test that pays no regard to the type of franchise system or the size or resources of the parties.
The amendments are a terrible outcome for the franchising sector in general, and the smaller operators in particular.
A franchisor is supposedly liable for breaches of s328 and can face fines of $54,000 for their franchisee’s underpayment offences when “they knew or ought reasonably to have known of the contravention and failed to take reasonable steps to prevent them”.
The amendments also suggest a view that the entire franchise industry, and franchisors, are negligent or knowing accomplices in the exploitation of workers.
Fair Work Ombusdman Natalie James has pushed for the changes. Photo: Penny Stephens
In fact, most franchisors in Australia take pride in carrying out their due diligence in ensuring a properly run franchise network.
These amendments go well beyond the purpose of preventing exploitation of vulnerable workers by extending to workplace obligations, which rest with an employer not with a franchisor. (Section 328 in fact deals with high-income employees. This is inconsistent with the purpose of protecting “vulnerable” workers.)
The amendments are a terrible outcome for the franchising sector in general, and the smaller operators in particular. They are unduly prejudicial towards franchisors with respect to accessorial liability provisions, and franchisees will be hit hard with additional compliance costs as increased audit fees are passed on by franchisors.
The FCA – whose membership includes 7-Eleven – wants the legislation to be either blocked or severely modified.
Representing the 1100 brands and supporting 79,000 separate small businesses that between them employ 472,000 people, the FCA has asked for clarification on the bill’s changes, including what constitutes “reasonable steps”, the inclusion of a requirement to consider the size and resources of a franchise system, the provision of an approved compliance guide, greater emphasis to “Right Size” the law to consider appropriately the mixed scale and diversity of franchises operating within the industry, and increased focus on the underpayment of employees.
The 7-Eleven problems are in the minority in the franchising sector. The fact is the law does work in its current form.
Left unchanged, these laws will significantly impact this diverse and evolving industry by increasing exposure to liability for franchisors, holding companies in uncertainty with compliance requirements, and weakening both domestic and foreign investment as the focus of investors shift to less regulated pastures.
All up these changes add up to a catastrophic event for the franchising sector, affected industries and Australia’s economy.
Bruce McFarlane is managing partner at law firm BlueRock Partners.