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Franchisors & Holding Companies may face significant penalties and held responsible for employee underpayments

NewsFlash 10 March 2017

Recently the Turnbull Government introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017. The legislation is a direct response to investigations into the 7-Eleven chain and its focus is to make franchisors and holding companies responsible for exploitation of visa workers and deliberate underpayments made by franchisees and subsidiaries.

The legislation, if passed will amend the Fair Work Act 2009 (Cth) and will:

  • hold franchisors and holding companies responsible for certain contraventions of the Act, such as underpayments by franchisees or subsidiaries where they knew or ought reasonably to have known of the contraventions and failed to take reasonable steps to prevent them;
  • increase maximum civil penalties for certain serious contraventions of the Act;
  • increase penalties for employee record-keeping failures such as pay slips;
  • provide an express legal platform to prohibit employers from unreasonably requiring their employees to make payments, such as demanding a proportion of their wages be paid back in cash;
  • provide the Fair Work Ombudsman with evidence-gathering powers similar to those available to other corporate regulators such as the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission; and
  • prohibit the hindering or obstructing of the FWO and or an inspector in the performance or his or her functions or powers, or the giving of false or misleading information or documents.

Penalty increases

The Explanatory Memorandum makes it clear that any increase in penalties is not designed to target employers who genuinely overlook record-keeping requirements. "Rather, it is aimed at deterring the small minority of employers who deliberately fail to keep records as part of a systematic plan to underpay workers and disguise their wrongdoing." The EM also makes the point that current penalties for failure in record keeping under sections 535 and 536 of the Fair Work Act are too low compared to other civil penalty provisions within the Act. The new laws will result in a tenfold increase in the maximum penalty for serious contraventions of the Fair Work Act 2009, up to $540,000 for a corporation and $108,000 for an individual.

Impact of the new laws on franchisors and ‘holding companies’

The Bill amends the Fair Work Act to insert new provisions to hold ‘responsible franchisor entities’ and ‘holding companies’ responsible for certain contraventions of the Act by businesses in their networks. The new provisions supplement and do not override the existing accessorial liability provisions (section 550) – which is the focus of our next Employment Law Seminar scheduled in Brisbane for 5 April 2017.

Under the existing laws a person may be held responsible for being ‘involved in’ a contravention, even if they are not the direct employer (section 550). This is known as accessorial liability. There is no accessorial liability if a person genuinely ‘did not know’. The proposed changes mean the responsible franchisor or holding company does not need to have actual knowledge of the franchisee's contravention to be held liable. According to the EM, "it is enough that the responsible franchisor entity could reasonably be expected to have known the contravention would occur, or that a contravention of the same or a similar character was likely to occur”. Under the new laws a franchisor or holding company’s head office will be responsible and liable for underpayments where three conditions are met:

  1. if it has significant influence or control over franchisees or subsidiaries;
  2. it knew or should reasonably be expected to have known of the underpayment or related breach,
  3. it failed to take reasonable steps to prevent the breach from occurring.

The practical implication of the laws is that those who are complicit or wilfully blind to underpayments within their network will be responsible for rectifying those underpayments.

Please contact our Employment, IR and Workplace Safety Team to discuss the implications of these new laws on your business or click here to register for 5 April 2017 seminar about accessorial liability.

Peta Tumpey, Partner

Vanessa James-McPhee, Senior Associate

NewsFlash 10 March 2017
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