Business / Commercial

A Franchisor's Responsibility For Franchisee's Compliance With Employment Laws

Several well known franchise systems have recently made headlines in Australia in relation to Franchisees who have committed breaches of employment laws by underpaying staff and wage fraud. This has resulted in the Turnbull government introducing the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 ("Aussie Bill"). This Bill provides that Franchisors will be held liable for workplace violations by their Franchisees if they have significant influence or control over the Franchisee; if they knew or should have known of the underpayments; and if they failed to take reasonable steps to prevent the violations. For many commentators, while there is a recognition that some things need to change, this is seen as a step too far and some have even gone as far as to say that this would be the end of franchising in Australia as they know it.

New Zealand does not yet have any employment laws which are similar to the Aussie Bill. The one exception to this is the Health and Safety at Work Act 2015 ("HSWA"), where organisations are required to ensure the health and safety of their employees who, when carrying out their work, are influenced or directed by that organisation. A Franchisor could therefore have liability under the HSWA if it takes a hands on role in relation to the day to day management of it's Franchisees' employees.

There are two issues here - Franchisors controlling the day to day management of their Franchisees' employees and Franchisors assisting their Franchisees to comply with their obligations as employers.

As a general rule Franchisors should distance themselves from controlling the day to day management of their Franchisees' employees. Any decisions their Franchisees make in relation to their employees and the daily management of those employees should be left to the Franchisees. We have seen Franchise Agreements which provide Franchisors with the right to approve all employees and require the Franchisees to take disciplinary action if required by the Franchisor. These are provisions which we believe are not appropriate in a Franchise Agreement.

Assisting Franchisees to understand their obligations as an employer and having the ability to take action if a Franchisee does breach these obligations is important to Franchisors. Franchisors want to support their Franchisees to operate the business efficiently and in accordance with their legal requirements. Franchisors also want to avoid any detrimental impact on the franchise brand which could result from a Franchisee who is investigated or prosecuted for employment law breaches.

Set out below are steps which Franchisors can take to assist their Franchisees to comply with their employment obligations and to ensure that if they don't that the Franchisor has the tools to deal with the situation quickly and effectively.

  1. The Franchise Agreement - this should provide a Franchisor with the ability to:
    • ask the Franchisee for information to show that they are complying with employment laws;

    • conduct an employment compliance audit on the Franchisee to check for themselves that the Franchisee is complying with all relevant employment laws;
    • obtain information about any investigative or compliance action taken by government organisations such as Ministry of Business, Innovation and Employment ("MBIE") or WorkSafe.  The Franchisee should be required to provide the Franchisor with immediate notice of such action and keep the Franchisor updated with the progress of any such investigation or compliance action;
    • take over and manage the Franchisee's business if the Franchisor considers this is the best option in the circumstances;
    • immediately terminate the franchise agreement for any serious employment law breaches.
  1. Set the scene – during the initial training programme a Franchisee should be provided with information about their obligations as an employer.  They should understand the importance that the Franchisor places on such compliance and that compliance is necessary for their business, the brand as a whole and other Franchisees in the system.  We recommend that Franchisors consider using an employment lawyer to assist them with their training materials on this topic.
  1. Business model – Franchisors should ensure that their franchise business model will enable Franchisees to operate profitably without cutting any corners.
  1. Ongoing training and education – Franchisors should consider providing their Franchisees with ongoing training and education to assist them to understand their obligations as employers. Again Franchisors should consider engaging an employment lawyer to assist with this.
  1. Manuals – Any information in the Franchisor's manuals about employment law obligations should be kept accurate and up-to-date. We strongly recommend getting an employment lawyer to either draft or review any employment information. Manuals which contain out of date and inaccurate information could expose Franchisors to liability if Franchisees rely on the information and suffer loss as a result.
  1. Legal advice – Franchisors should consider providing their Franchisees with the details of experts who can assist Franchisees with their employment issues. We know of some Franchisors who have even engaged a lawyer to provide their Franchisees with limited advice on employment issues at no cost to the Franchisee.
  1. Reporting – Franchisors should consider requiring their Franchisees to report to them on a regular basis on their compliance with employment laws – for instance; confirming that all employees have signed employment agreements in place and also providing details of any employment claims which have been made.
  1. Act promptly - If a Franchisee is the subject of an investigation or compliance action is taken the Franchisor should act immediately – they should obtain the information about the situation both from the Franchisee and MBIE to satisfy themselves about exactly what has occurred and the risk to the brand. If the matter is serious enough, the Franchisor should consider getting advice from a PR consultant to assist with any publicity which may result. The Franchisor should consider what action it needs to take in relation to the matter and seek legal advice.
  1. And lastly the Franchisor should never turn a blind eye to any alleged or actual employment breaches by its Franchisees which they become aware of. Franchisors should act promptly to get the information they need and take the action required to protect the system, the brand and most of all the people who are vulnerable to be taken advantage of in an employment situation.

A Franchisee's non-compliance with employment laws has the potential to have a devastating impact on a franchise brand. This is one situation where the phrase "any publicity is good publicity" could not be further from the truth. Good and responsible Franchisors will have Franchise Agreements which provide them with the right to deal promptly and effectively with such matters. Their Franchisees will also have the tools to assist them to comply with their employment obligations and will act promptly if the worst happens.

Brookfields lawyers have the expertise to make sure a franchise agreement is in the right shape and provides Franchisors with the tools they need to deal with any employment law issues. They can also assist Franchisors to educate their Franchisees and provide Franchisors with the advice if the worst occurs.

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