Corporate Responsibility and Franchising

Protecting vulnerable workers: can the UK learn from Australia?

By Douglas Brodie - Posted on 18 August 2023

In all parts of the UK the regulation of a franchise is seen as a matter for commercial law. Any dissatisfied franchisor or franchisee will be held to the terms of any bargain undertaken and cannot expect judicial intervention to come to their rescue should their expectations not be met. In practice, the franchisee is more likely to be the party who experiences disappointment. The dream of having their own business may turn into a financial nightmare if attaining a satisfactory or even adequate income turns out to be nigh on impossible given the franchisor’s business model. The venture may be doomed from the start. The behaviour of the franchisor during the life of the franchise may also be problematic. The franchisor may act against the franchisee’s interests by, for example, setting up another franchise nearby. Legislatures in a number of jurisdictions have responded to such concerns by introducing measures protective of the franchisee’s position.

Recent Australian experience highlights further problems that may arise from the extensive use of the franchise model. The challenges faced by franchisees may result in a number of risks being faced by their employees such as the possibility of non-compliance with contractual or statutory employment rights. In 2014 the Fair Work Ombudsman (FWO) in Australia launched an inquiry into allegations of underpayment of wages and falsification of employment records that were suspected of occurring across many 7-Eleven stores in Australia. This led to the publication by the FWO of a very critical report in 2016 which upheld many of the allegations: ‘Identifying and addressing the drivers of non-compliance in the 7-Eleven network’. One of the difficulties encountered by employees is that, while their employment contract is with the franchisee, a struggling operator may not be in a position to meet a claim. Events in Australia also remind us that some employees (such as migrant workers) are more vulnerable than others.

The Australian legislature has responded to the problems brought into the public gaze by the FWO and others by passing the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 to guard against the occurrence of prescribed contraventions of employment rights by a franchisee. The franchisor will now also bear responsibility in law where they knew, or could reasonably be expected to have known, that a contravention(s) would occur. A defence exists where the franchisor took ‘reasonable steps’ to prevent the contravention. A major test for the new legal framework looms as the Australian trade union for retail workers (Shop, Distributive and Allied Employees Association) has backed a class action against several hundred McDonald’s operators and McDonald’s itself. The action alleges denial of rest breaks at nearly 1,000 current and former franchises. It has been suggested that should the action be successful the cost to McDonald’s could be in the region of $250 million.

I would suggest that the 2017 Act (which amended the earlier Fair Work Act 2009) is of considerable interest to employment lawyers in the UK. It looks beyond the contractual framework to impose obligations normally only owed by an employer on someone who is not a party to the employment contract. Such an allocation of responsibility has much to commend it. Franchisors tend to exert a high degree of control over their franchisees. The less than intrepid traveller chooses to eat in McDonald’s in the knowledge that any meal consumed will look and taste exactly the same in all parts of the globe. I would maintain that with control comes responsibility. In Australia the FWO also took the view that franchisors have a moral and ethical responsibility for the employees of the franchisee. It might also be said that given the profits gained by the franchisor from the running of a franchise it is only fair that they accept responsibility for liabilities that arise. Such a scheme also has a deterrence function in that it encourages the franchisor to take steps to ensure that franchisees run their branches properly.

The extent of protection afforded by the 2017 Act will clearly depend, in part, on judicial interpretation and the phrase ‘could reasonably be expected to have known’ could prove pivotal. Will it be possible to argue that the franchisor could be expected to have known that a contravention would occur given the terms of the business model? It is worth nothing that the FWO inquiry found that ‘controlling labour costs was possibly the only lever available to franchisees to significantly reduce their costs and increase net profit.’  In such circumstances we should not be surprised if a failure to comply with employment rights arises. Such a model will only work for the franchisee where they fail to remunerate in line with the contract.  

By way of conclusion, I would suggest that the Australian legislation points to a gap in protection in the UK and offers a model that merits serious consideration. Beyond the world of franchising it also prompts us to consider who (the contractual employer apart) should bear responsibility for the wellbeing of workers.