In recent years, joint employer liability has emerged as a persistent threat for companies who use franchise business models. Franchisors are increasingly facing claims brought by employees of franchisees for entitlements flowing from their employment. The outcome in these cases is unpredictable because the law is undergoing change. As such, the joint employer aspects of franchising arrangements can prove to be a minefield for the unwary and are a growing global concern.
It has never been more necessary for franchisors to take proactive steps to assess joint employment risk, including a detailed examination of their business operations as well as their contractual arrangements with franchisees. Being proactive enables the franchisor to make any necessary adjustments to its working relationships and the terms of its contracts with franchisees and provides the ability to mitigate risks through insurance or indemnification clauses.
The recent Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 was enacted in response to media coverage regarding the exploitation of vulnerable workers in large franchise systems and introduced potential liability for franchisors for their franchisees' breaches of Australian workplace laws.
The new legislation imposes liability on a "Responsible Franchisor Entity" if it knew or could reasonably be expected to have known that the contravention of employment laws by the franchisee would occur, or that a contravention by the franchisee "of the same or a similar character" was likely to occur. To be a "Responsible Franchisor Entity": (1) there must be a "franchise" relationship, which is broadly defined; and (2) the "franchisor" must have a significant degree of influence/control over the franchisee entity's affairs.
A franchisor will not be liable if it had taken "reasonable steps" to prevent its franchisee's contravention of employment laws. A court may consider the following factors in determining whether "reasonable steps" were used: the size and resources of the franchisor, any actiown taken to ensure the franchisee had a reasonable knowledge and understanding of the legal requirements, the franchisor's arrangements for assessing the franchisee's compliance, and the extent to which the franchisor's arrangements with the franchisee encouraged compliance with workplace laws.
Guidance from the Fair Work Ombudsman suggests it will expect certain franchisors to take a proactive approach (e.g...