Amid the heated discussion over same sex marriage and the dual citizenships of Federal Members of Parliament, the Australian Senate last week passed the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017.

Despite vigorous lobbying by the Franchise Council of Australia (FCA), the legislation was passed with Opposition amendments tightening clauses on employer obligations for record keeping and cashback scams.

Government amendments aiming to win the support of Senators Cory Bernardi and David Leyonhjelm by paring back the liability threshold for franchisors contained in the bill passed by the House of Representatives were lost.

The Government also lost a provision included in the bill that had attempted to provide coercive investigative powers to the Fair Work Commission (FWC) in instances of unlawful industrial action.

The Coalition Government had made the protection of vulnerable workers an election commitment, after the 7-Eleven wages scandal revealed underpayment of workers, rorting of student visas and other exploitation measures, including wage payments made but then clawed back by franchisees.

The exploitation of employees was investigated by a Senate Committee which recommended changes to laws to ensure franchisors had a responsibility for deliberate avoidance of workplace laws and employment awards.

Michaela Cash, the Federal Minister for Employment, said the bill would protect workers from unscrupulous employers and tackling allegations of fraud and exploitation in Australian workplaces. She added that it ensures businesses are operating on a level playing field by introducing a higher scale of penalties (up to 10 times the current amount) for a new category of ‘serious contraventions’ of prescribed workplace laws.

The bill also expressly prohibits employers from unreasonably requiring employees to make payments (ie ‘cashback’ arrangements) and strengthens the evidence gathering powers of the Fair Work Ombudsman in cases that could involve the exploitation of vulnerable workers.

The bill also introduces stronger provisions to make franchisors and holding companies responsible for breaches of the Fair Work Act in certain circumstances where they are culpable for the breaches.

Murky waters

Extending liability for breaches of workplace laws to franchisors was strenuously opposed by the FCA. Former Coalition Small Business Minister Bruce Billson was appointed as the organisation’s executive chair in 2016 and advocated against the Vulnerable Workers legislation.

The FCA’s lobbying attempts were undermined by ongoing concerns about 7-Eleven’s compensation process for employees, who had been underpaid by franchisees and by revelations in other retail chains, including Caltex, Pizza Hut and Domino’s Pizza.

The FCA had been lobbying for amendments to the bill “to accommodate the diversity in size, resources and format of Australian franchise business”.

The council said that if new legal obligations are to be introduced to make franchisors responsible for franchisee-employers properly paying their employees, this new accountability should depend on the franchisor having control or significant influence over this aspect of a franchisee’s business.

On behalf of the FCA, Billson argued the new legislation would impact on investment in the sector, dissuading overseas franchise systems from coming to Australia and limiting growth in existing systems.

In the end, the bill amended by the Senate was tougher than the Government had proposed rather than more lenient.

Michaela Cash said the strengthened penalties contained in this Bill will act as a significant deterrent to unlawful practices.

“They will also ensure that the small minority of unscrupulous operators think twice before ripping off workers,” the Minister said. “The FWO’s new powers and the franchising provisions will be vital in tackling worker exploitation, in important cases like that of 7-Eleven.”

The vulnerable workers legislation will have a greater impact on the franchising sector than on other employers as most other business models would have corporate centralised payroll management systems.

In a franchise system, the franchisee invariably appoints, manages and pays the employees who work in the outlets and franchisors argue that they have no legal control over the franchisee or certainty of compliance by the franchisee with workplace laws.

Following the legislative change it is likely that franchise agreements will need to be changed but, in the interim, there may well be challenges to franchisor and franchisee relationships as well as additional costs.

Red tape is not the answer

The FCA was not the only industry association that expressed concern about the vulnerable workers legislation.

The National Retail Association (NRA) expressed concerns about new provisions in the bill would add even more red tape to what is already a highly complex area of the Fair Work Act for franchisors and franchisees to navigate.

Dominique Lamb, the NRA CEO, said the legislation may add significant expense and complexity to franchisor’s business models, which could result in requirements for businesses to police each other, instigate expensive and time-consuming auditing processes, and erode the important relationships between franchisors and franchisees.

“This erosion is likely to impact the number of franchises in the market, add significant expense to franchisees and franchisors and deter entrepreneurs from considering franchising as an option,” Lamb said.

“The overwhelming majority of franchisors dedicate great time and effort to ensuring they have good relationships with their franchisees and protecting their brands by educating business owners within that brand.

“But these provisions go one step further, and will only serve to punish an entire industry for the mistakes of a few.”

Lamb said franchising has functioned extremely well for decades in Australia, has helped foster good working relationships between the majority of franchisors and franchisees, and is well-regulated by the Australian Competition and Consumer Commission and the Fair Work Ombudsman.

Lamb said the NRA was concerned that, under the provisions of the vulnerable workers bill, a franchise group could be hit with heavy fines for every instance of underpayment by a franchisee.

“When there are large businesses such as Masters and Dick Smith falling over, more regulation and red tape is rarely the answer. It creates more problems than it fixes, and acts as a deterrent to job creation in one of the most important industries in Australia,” Lamb said.

The FWC said some provisions of the bill will come into effect immediately it receives Royal assent while the remaining provisions will apply within six weeks of the Royal assent. It also believes the bill provides increased penalties for breaches of record keeping or payslip obligations and will make it clear that employers can’t ask for ‘cashback’ from employees or prospective employees.

Employers who don’t meet record keeping or pay slip obligations and can’t show a reasonable excuse, will need to disprove wage claims made in a court following one of the Labor Opposition amendments which created a reverse onus of proof for employers.

The FWC will also have stronger powers to collect evidence in investigations, new penalties where false or misleading information is supplied or where investigations are hindered or obstructed.

The liability of franchisors or holding companies in cases where franchisees or subsidiaries breach workplace laws and underpay their employees is triggered where they knew or should have known and could have prevented the breaches.