Franchise Law – increased compliance obligations

A recent joint investigation by Four Corners and Fairfax Media found evidence of the systemic underpayment of wages as well as the doctoring and falsifying of payroll records by 7-Eleven, the largest convenience store chain in Australia. That investigation was then followed by an Inquiry by the Fair Work Ombudsman.

Following the release of the Ombudsman’s report last year there have been a number of changes mooted in relation to franchisor responsibilities.

The proposed changes combined with the introduction of an extension of unfair contract terms protections to cover small business contracts means that more than ever before franchisors must be fully informed of their legal obligations to avoid inadvertently breaking the law.

Franchisor obligations under the Fair Work Act

The provisions of the Fair Work Act 2009 (Cth) (FWA) already provide that a franchisor may be penalised for a failure by one or more of its franchisees to comply with the Act.

The FWA provides that a franchisor must be “knowingly involved in” a contravention by the franchisee of a civil remedy provision before the franchisee will be found to be an accessory to the contravention. The franchisee will only be found to be involved in the contravention if it:

  • aided, abetted, counselled or procured the contravention; or
  • has induced the contravention, whether by threats or promises or otherwise; or
  • has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
  • has conspired with others to effect the contravention.

Deliberately ignoring obvious facts or turning a blind eye may constitute actual knowledge of a breach. These provisions apply to a franchisee company’s managers, HR personnel and senior leaders and any other employees functioning at management levels.

Increased franchisor liability for workplace law breaches

Following the 7-Eleven scandal the government proposed to strengthen the FWA to protect franchise workers. The aim of the proposals is to protect the vulnerable workers who were exposed as being most exploited such as international student workers and visa-holders.

The government’s Policy to Protect Vulnerable Workers proposes an increase in penalties for non-compliance with the FWA requirements in respect of record keeping obligations from a current maximum of $27,000 per breach to a maximum of $270,000 per breach.

It is also proposed that provided it can be shown that the franchisor should have reasonably been aware of the breaches committed by the franchisee and the franchisor could have reasonably taken (and failed to take) action to prevent those breaches from taking place then a franchisor who fails to deal with the exploitation of workers by a franchisee will be liable for the breaches by the franchisee.

The importance of taking reasonable steps

The proposed amendments to the FWA contain an exemption for any franchisor who is found to have taken reasonable steps to educate its franchisees about workplace obligations and who have put in place clear processes to ensure this education is provided to franchisees.

If you have any concerns about the fulfilment of your workplace obligations please contact us to discuss how we can assist you in implementing appropriate training and education programs addressing workplace obligations with your franchisees. We are also able to assist with reviewing franchise agreements and auditing and compliance checks.

Extension of unfair contract terms protections to small business contracts

From 12 November 2016 the Unfair Contract Terms Regime (UCT Regime) was extended to cover standard form contracts entered into with ‘small business’.

The changes apply to any standard form small business contract for the supply of goods and services, including financial services or products or an interest in land. A wide range of contracts are affected including franchise agreements.

The changes add to the extensive compliance and regulatory obligations already affecting franchisors under the Franchising Code of Conduct.

Any term that is found to be unfair in a standard form small business contract will be void. Australia will be the only country in the world to apply this type of stricture to business to business contracts.

 What is a ‘small business contract’?

A contract is considered to be a small business contract where:

  • at least one of the businesses employs less than 20 people; and
  • the upfront price of the contract is no more than $300,000 or $1million if the contract length exceeds 12 months.

The fact that a franchisor may themselves be a small business does not provide an exemption from the UCT Regime. The provisions can be used by one small business against another small business. There is a presumption that a contract is a standard form contract unless it is proven to be otherwise.

Although a ‘standard form contract’ is not defined, the UCT Regime does provide that a court may take into account matters such as whether one party has more bargaining power than the other party. When the contract was prepared and whether there was any opportunity to negotiate on the terms of the contract as well as whether the contract was customised for the particular transaction are also facts that may be considered.

Negotiations in relation to price will not count as negotiations in respect of the contract for the purposes of deciding whether a standard form contract was used.

 When will a term be “unfair”?

Contractual terms will considered to be unfair if they cause a significant imbalance in the rights and obligations between the parties and where a term goes beyond what is reasonably necessary to protect a party’s legitimate interests. In addition, a contractual term will be unfair if it would cause the other party financial detriment if relied upon.

Limited Exemptions

While the UCT Regime does provide for limited exemptions for terms permitted by other laws such as the Franchising Code it is critical that franchisors are aware that no blanket exemption has been allowed for franchise agreements. On the contrary there have been multiple recent publications released by the Australian Competition and Consumer Commission that highlight franchise agreements as being one of the key areas to be covered by the new regime and an area of focus for current education programs.

What will happen if a contract term is found to be unfair?

If a term of a small business contract is declared to be unfair that term will be void. The remainder of the contract will continue to operate to the extent that it is capable of operating without the unfair term. However, the UCT Regime expressly considers that a situation arises whereby the whole of a contract is lost.

The changes have a significant impact and increase the compliance obligations already placed on franchisors, particularly those franchisors who qualify as being small businesses or who contract with small business franchisees. We would be happy to advise and assist you in ensuring that you meet all our current and future legal obligations.

If you or someone you know wants more information or needs help or advice, please contact us on 08 9422 8111 or email buslaw@taitlegal.com.au.