Please note: We are aware of an issue preventing some users from deleting documents they have previously uploaded in the LHLO Portal. Thank you for your patience as we fix this issue.

Franchisees and franchisors – navigating your legal obligations

4 July 2024
Franchisees and franchisors – navigating your legal obligations

It is important for franchise businesses to understand the legal obligations that apply when supplying labour hire.

A franchise is a business where a franchisee pays a fee to a franchisor to sell their products or services, while using their branding, trademarks, suppliers and business systems.

A franchisor largely controls how the franchisee’s business is run and may obtain and allocate work leads or contracts to franchisees.

Contractual obligations between the franchisor and franchisee are set out in their franchise agreement, but businesses must also comply with all relevant workplace laws, as well as licensing obligations when supplying workers.

Under the Labour Hire Licensing Act 2018 (Vic), franchisee and franchisor businesses that supply labour workers directly or indirectly to a host may require a labour hire licence.

In the commercial cleaning, horticulture and meat processing industries, businesses that provide staff to perform work are more likely to be providing labour hire services and require a licence.

However, individuals or corporations with no more than two directors, and who perform all work duties themselves, do not require a licence.

Additionally, franchisors must only enter arrangements with licensed providers, and may be at risk of prosecution where they enter arrangements with franchisees who do not hold a labour hire licence when required.

Under the Act, penalties for using or providing unlicensed labour hire services can exceed:

  • $600,000 for a corporation
  • $150,000 for an individual.

Franchisor liability and responsibility

Franchisors have additional obligations to ensure their franchisees are meeting their workplace obligations, and can be held accountable when non-compliance occurs.

A franchisor can be held legally responsible if a franchisee fails to comply with licensing and workplace laws, including situations where a franchisee fails to:

  • meet the entitlements under the National Employment Standards (NES) or other awards and agreements
  • comply with rules for methods and frequency of payment, including record keeping
  • correctly engage a worker as an employee, instead of as an independent contractor.

Responsible franchisors can be held legally responsible for franchisees' conduct if they:

  • knew, or could reasonably be expected to have known, that a relevant contravention would happen
  • at the time the contravention happened, knew, or could reasonably be expected to have known, that a contravention of the same or similar kind was likely to happen
  • haven't taken reasonable steps to prevent the contravention or a contravention of the same or similar character.

For more information on franchisor responsibility, visit the Fair Work Ombudsman website.

Franchisor held liable for franchisee underpayments of workers

Recently, the Fair Work Ombudsman (FWO) penalised a coffee chain franchisor $1.44 million for its “systematic failure to ensure compliance within its franchise network”, including underpayments at a number of its franchisee outlets.

While the franchisor did not underpay the workers directly, it was held legally liable for the underpayment and various record-keeping contraventions because it should reasonably have known, and from 1 April 2019 did know, its franchisees would commit those or similar contraventions and it did not take reasonable steps to prevent that from occurring.

In their judgement, Justice Robert Bromwich found that the franchisor “does not, and could not, dispute the FWO’s accurate assertion that the facts demonstrate a systematic failure to ensure compliance within its franchise network.”

Justice Bromwich noted that the exposé of systemic non-compliance by franchisees, particularly in the food retail industry and particularly affecting vulnerable workers on temporary visas, had been the background to the package of reforms that introduced franchisor liability.

“In the franchise context, it must not be seen as acceptable for franchisors to tolerate, or turn a blind eye to, franchisee contraventions as an ordinary part of business,” Justice Bromwich said.