By Jessie Lapthorne, Katrina Hammon and Graeme Tanner*
In recent years, franchisors operating in the Australian market have expressed concerns in relation to potential liability for the actions of individual franchisees in light of accessorial liability provisions in the Federal Fair Work Act 20091.
In April 2016 those concerns were realised when the Fair Work Ombudsman released the findings of a wide ranging inquiry into allegations of worker exploitation by various franchisees operating under the 7-Eleven chain of convenience stores. That inquiry included an investigation into the franchisor’s role in systemic breaches of worker entitlements and has been followed by a number of cases where franchisors have been investigated and in some cases prosecuted for their involvement in breaches of minimum employment standards by individual franchisees.
While the issue of franchisor liability for breaches of employment standards by franchisees has yet to be determined in a New Zealand context, recent amendments to the Employment Relations Act 2000 suggest that similar prosecutions could arise in this jurisdiction.
The Fair Work Ombudsman’s inquiry into exploitation of predominately migrant workers by 7-Eleven stores in Australia made international headlines in 2016. The inquiry related to complaints about widespread exploitation of workers by a number of franchisees who were systematically failing to provide their workers with minimum entitlements. The breaches of minimum standards were extensive and affected hundreds of workers who, in some cases, were being paid less than half of the relevant minimum wage.
As part of the inquiry, the Fair Work Ombudsman investigated not only the actions of individual franchisees in failing to comply with minimum wage and record keeping requirements, but also the role that the franchisor had played in those breaches. Particular consideration was given to section 550 of the Fair Work Act which allows for any person (including a corporate entity) to be held liable for contravention of minimum employment standards if they:
While 7-Eleven was heavily criticised for failing to take steps that could have prevented breaches of minimum standards within its network, ultimately the Fair Work Ombudsman decided not to prosecute the 7-Eleven franchisor. That decision was taken on the basis that there was insufficient evidence to prove that the head office was knowingly involved in the breaches and therefore could not be held to be an accessory to them.
Instead, the inquiry resulted in a number of prosecutions of individual franchisees. Those prosecutions have seen the recovery of substantial unpaid wages as well as the imposition of significant fines, including, in the case of a Brisbane 7-Eleven store owner, the imposition of the largest fine recorded by the Fair Work Commission of $400,0002.
While the franchisor itself was not prosecuted, the 7-Eleven inquiry did highlight the potential for liability to attach in this area and suggested that, in appropriate cases, franchisors may well be held to be liable as an accessory to the actions of individual franchisees. There have since been calls from a number of interested parties to further increase powers under the Fair Work Act in relation to worker exploitation.
Fair Work Ombudsman v Yogurberry World Square Pty Ltd
Shortly after the 7-Eleven inquiry, the Fair Work Ombudsman again had cause to consider how section 550 of the Fair Work Act could be applied to franchisors in relation to another instance of worker exploitation by a Yogurberry franchisee.
The Yogurberry case involved similar issues to those investigated in the 7-Eleven inquiry and related to four Korean workers employed by a Yougurberry franchise in Sydney being underpaid by a total of $17,827 between July 2014 and May 2015.
Unlike the 7-Eleven inquiry, the Yoguberry case resulted in the accessorial liability provisions of section 550 of the Fair Work Act being relied upon by the Fair Work Ombudsman. In particular, the Fair Work Ombudsman alleged that the master franchisor of the Yogurberry chain had been directly involved in determining pay rates and that the exploitation of workers had occurred despite previous warnings.
In its determination, the Fair Work Commission accepted the position that liability, on the facts of the case, should extend beyond simply the franchisee and agreed that fines were also justified in respect of the master franchisor and its payroll agent for their involvement in the contravention of minimum standards by the franchisee. While the local store that employed the workers received the most substantial fine, $75,000, the master franchisor was also held liable for the breaches and fined $25,000.
The Yogurberry case demonstrates that, while franchisors should certainly remain wary of prospective amendments to the Fair Work Act, which could increase the powers of the Fair Work Ombudsman, the Act already carries sufficient powers to prosecute franchisors that are directly involved in breaches of employment standards and worker exploitation by individual franchisees.
New Zealand Position
With that in mind, the question arises of whether a similar climate for potential franchisor liability exists in New Zealand.
Traditionally, franchisors in New Zealand have not been responsible for the conduct of individual franchisees that operate as separate legal entities. This is one of the obvious benefits of operating a franchise business model as it allows the franchisor to profit from the trade of the franchisee while remaining reasonably insulated from liability attaching to any misconduct by the franchisee. In April 2016, however, the Employment Relations Act was substantially amended by way of the Employment Standards Bill.
Among other things, the Employment Standards Bill amended the Employment Relations Act to provide labour inspectors in New Zealand with significantly increased powers to deal with the issue of worker exploitation and enforcement of minimum employment standards (such as minimum wage and holiday pay entitlements)3.
Notably, the amendments included significant increases in the maximum penalties for parties found to be in breach of minimum standard entitlements. In the case of individuals who are found to be in breach of the minimum standard provisions, the maximum penalty that can be imposed has increased from $10,000 to $50,0004. A body corporate found to be in breach of minimum standard requirements can be ordered to pay a penalty of up to $100,000 or three times the amount of the financial gain made by the body corporate as a result of the breach. This represents a significant increase from the previous maximum penalty of $20,000.
The amendments to the Employment Relations Act also included the addition of provisions that are similar in effect to the accessorial liability provisions of Australia’s Fair Work Act.
Specifically, the amendments provided the ability to hold “officers” of an employer liable for a breach of minimum standards by the employer if that officer has5:
The term officer is not strictly defined but does include any “person” (which can be a company) in a position to exercise significant influence over the management or administration of the employer.
While ultimately the interpretation of the new provisions of the Employment Relations Act will be determined by the courts, the similarity with the provisions of Australia’s Fair Work Act are striking and, given the application of those provisions to hold franchisors liable in Australia, it seems likely that a similar interpretation will be adopted in New Zealand.
It is also notable that the Ministry of Business, Innovation and Employment which, through its labour inspectors, is tasked with enforcing the minimum standards in New Zealand, has expressed its view that the new provisions are wide enough to capture not only those in management positons within a company, but also external parties that exercise significant control over the observance of minimum standards. The Ministry has specifically noted its view that the provisions are wide enough to extend to external payroll and legal advisors that exercise significant control over an employer and it is not a stretch to see a similar approach to that adopted in Australia being employed in New Zealand moving forward.
While the Ministry has not specifically referenced franchisors in its most recent publication on this issue, the natural reading of the amendments suggests that, if franchisors are directly involved in setting pay rates or processes that do not comply with minimum employment standards, they may well be liable for both the recovery of unpaid wages and penalties under the Act.
While it remains to be seen how New Zealand’s courts will interpret the new provisions of the Employment Relations Act, the wording does suggest that a franchisor that exercises significant control over its franchisees could well be liable for failure to comply with minimum standards.
This would also seem consistent with the intent of the recent amendments of enforcing minimum standards by ensuring those in positions of power who knowingly participate in breaches can be held to account and, as such, franchisors should be taking steps to ensure that franchisees are complying with their employer obligations.
1 Federal Fair Work Act 2009, s550
2 Fair Work Ombudsman v Mai Pty Ltd & Anor (2016)
3 See Part 9A of the Employment Relations Act 2000
4 Employment Relations Act 2000, s 142G
5 Employment Relations Act 2000, s 142W
*Jessie Lapthorne is a partner in the Labour and Employment Practice Group in the Auckland office of Duncan Cotterill. Mrs. Lapthorne can be contacted at email@example.com. Katrina Hammon is an associate in the Corporate and Commercial Practice Group in the Auckland office of Duncan Cotterill. Mrs. Hammon can be contacted at firstname.lastname@example.org. Graeme Tanner is a senior solicitor in the Labour and Employment Practice Group in the Auckland office of Duncan Cotterill. Mr Tanner can be contacted at email@example.com.