New tenfold penalties for "serious contraventions" ‒ where does this leave franchisors and holding companies?

By Shae McCartney, Hilary Searing and Christie O'Donnell

14 Sep 2017

Holding companies and franchisors need to carefully consider the changes to responsibility for breaches of the Fair Work Act by subsidiaries or franchisees and what steps need to be taken to discharge their obligations under these changes.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 has been passed and it introduces amendments to the Fair Work Act designed, it says, to prevent wages rorts by placing responsibility on franchisors and holding companies for breaches of the Act by their franchisees or subsidiaries.

The legislation also introduces a new "serious contravention" provision which increases tenfold the penalty units payable for breach of a civil remedy provision of the Act in cases where a serious contravention has occurred (up to $540,000 for a body corporate).

These reforms mean more that ever it is not enough to say "I didn't know" and companies, and their officers, will need to be more vigilant than ever in taking proactive steps to ensure compliance of entities in their businesses.

Liability of holding companies and franchisors

Under the new provisions, holding companies and franchisors will be liable for the breaches of their subsidiaries or franchisees where they (or one of their officers) knew, or should reasonably have known, that the contravention of the Act would occur or that a contravention of a similar nature would occur.

This represents a lower threshold than the prior accessorial liability provisions and would be more likely to capture companies that claim to be unaware of the misdeeds of their franchisees or downstream operators, but should reasonably have been aware of these.

A qualification of this responsibility for franchisors is that the franchisor must have a significant degree of influence or control over the franchisee's affairs. However, what constitutes a significant degree of influence or control is not defined in the Act. The Explanatory Memorandum for the Bill states that the term "affairs", while not defined, is intended to be read broadly and is not limited to particular aspects of the franchisee's operations. That is, the influence or control over the franchisee's operations is not just limited to how much control or influence the franchisor may have over the employment affairs of the franchisee.

The qualification of significant control does not apply to holding companies however, and it appears that holding companies will therefore be held responsible for the conduct of their subsidiaries - where they knew, or should reasonably have known, that the contravention of the Act would occur, or that a contravention of a similar nature would occur.

The civil remedy provisions which a holding company or franchisor can now be held liable for are extensive, and include contraventions of:

  • the National Employment Standards;
  • Modern Awards; and
  • Enterprise Agreements.

The wording of the provisions is very broad and will encompass any contravention of one of the provisions listed. This is not limited solely to underpayment of wages.

The new serious contravention provisions (discussed below) will also apply, meaning holding companies and franchisors could have significant exposure in the cases of widespread breaches by their subsidiaries or franchisees.

Importantly, holding companies and franchisors can discharge their responsibility under this provision by showing they have taken reasonable steps to prevent a contravention.

What will be considered reasonable in each case will vary from organisation to organisation and the new provision, section 558B(4), sets out matters relevant to determining whether the organisation has taken reasonable steps. These include the size and resources of the company, action taken to ensure reasonable knowledge of employment obligations, and whether the business structure encourages breaches of the Act.

Serious contravention provisions

A tenfold increase in penalty units payable for breaches of civil remedy provisions has been introduced by this legislation where a serious contravention of the Act can be made out.

A serious contravention is defined in the new section 557A and requires knowledge and a systematic pattern of conduct relating to one or more persons. The legislation sets out (but does not limit) what the Court may consider when determining what is a systematic pattern.

In cases where a breach of the Act has persisted for a long period of time, affects multiple people and there has been no response to complaints about the contravention, it is more likely the Court would find a serious contravention.

Other new provisions: record-keeping, enforcement powers

The legislation is also designed to strengthen the prohibition on deductions from wages or the requirement for an employee to pay for something in circumstances that are considered unreasonable, such as demanding a proportion of their wages be paid back in cash.

Further, it also includes changes to record-keeping requirements and the onus of proof in relation to record-keeping.

Finally, the Fair Work Ombudsman has been given strengthened powers, similar to that of ATO, ASIC and the ACCC, to require the production of documents and answering questions under oath. These new powers do come with controls however, with oversight from the AAT and Commonwealth Ombudsman.

What does this mean for employers?

If you are a holding company or a franchisor these changes may affect you and you should consider what reasonable steps should be put in place in your organisation so that you can ensure you don't fall foul of the new increased penalty regime. Some simple steps can include:

  • knowing your obligations and educating your staff/franchisees;
  • addressing suspected or identified breaches in your wider group promptly, but with care. You will need to balance your visibility in addressing wrongdoing without assuming additional liability;
  • ensure contracts cover any remedial action required - for example your ability to terminate if someone in the operation is doing the wrong thing;
  • ensuring you have an appropriate paper trail documenting your compliance measures - policies, complaint procedures and audits; and
  • lastly, consider if there was an investigation how will you advise the steps you've taken? What story will your documents tell?

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.