Mark Branagan

Pay-slips, slip-ups and franchises

Mark Branagan

8 March 2017

Award Conditions

The Federal Government has introduced extensive changes to the Fair Work Act 2009 (FW Act) to massively increase penalties for businesses that underpay workers; engage in ‘serious contraventions’ regarding employee entitlements; and/or fail to keep records, such as pay-slips.  Penalties for ‘serious contraventions’ are increased tenfold, meaning that the maximum fine for a company will be $540,000 (currently $54,000) and individuals may be liable for penalties of up to $108,000.

The draft legislation also takes a major step towards spreading the regulatory and enforcement net by extending legal liability for FW Act breaches to franchisors running franchise networks and holding companies.

Many of the changes arise out of the findings of recent Fair Work Ombudsman (FWO) investigations into the 7-Eleven franchise chain, which revealed a disturbing systemic pattern of underpayments, non‑compliance with the FW Act and Award obligations and failure to observe minimum employee entitlements. Practices revealed by the 7-Eleven report disclosed underpayment of employees, unlawful cash deductions from wages, exploitation of migrant workers and deliberate falsification of employment records.

Historically, franchise networks have managed as a business model to maintain a special position in the context of employment law.  Franchisors traditionally operate separately from franchisees, with no direct employment relationship or responsibility for franchise employees at the operational level.  However 7-Eleven forced the Government to take direct action to challenge the franchise model.

Under the proposed new legislation, franchisors and/or holding companies will be subject to substantial penalties if they ‘knew or ought reasonably to have known’ of contraventions of the FW Act and failed to take reasonable steps to prevent such breaches. This presents a specific challenge to franchisors who play an active role in franchisee management.

Other changes to the FW Act include:

  • doubling penalties for lesser offences such as failure to keep records, including payslips (increasing from $27,000 to $54,000 for companies and from $5,400 to $10,800 for individuals);
  • stricter prohibitions on cash deductions from wages to explicitly prohibit ‘cashback’ arrangements which are directly or indirectly for the employer’s benefit; and
  • increasing the FWO’s powers of investigation.

While these changes extend potential liability to franchisors and holding companies, the existing ‘accessorial’ liability provisions of the FW Act continue to apply to persons who are involved in breaches.  The changes are likely to encourage the FWO to continue its practice of investigating and pursuing all parties involved in multiple sub-contracting scenarios so as to pursue the primary or ‘head’ contractor and those responsible for large corporations.

This enforcement objective was most effectively demonstrated in the prosecution in FWO v Al Hilfi which was directed at the underpayment of contract trolley collectors at Coles supermarkets.  Although the trolley collectors were engaged through contracting arrangements, not directly by Coles, the FWO prosecuted Coles as an accessory.  To resolve that prosecution, Coles gave a wide-ranging enforceable undertaking to conduct ongoing compliance audits of wages paid to subcontracted trolley collectors, supported by a substantial financial commitment to rectify underpayments of more than $200,000.  Coles has also made significant changes to its contracting arrangements, reducing the number of contractors and subcontractors involved in collecting its trolleys and the scope for unidentified underpayments.

The increased penalties for record-keeping also emphasise the need for every employer and every entity that engages a contractor or subcontractors to have a compliance system.  While payslips are often seen as a purely administrative function generated through automated processing, it is important for all employers to understand the extent of these obligations under the FW Act and regulations.  Failure to keep proper records is a common basis for prosecution and in many cases has led to substantial penalties being awarded against companies. Accordingly, slip-ups on pay-slips may be very costly.

At present, the legislation has been presented to the House of Representatives and will be subject to further debate.  We will keep you informed of developments.

For more information please contact:

Mark Branagan, Paul Ronfeldt, David DaviesJacquie Seemann, Andrew Cardell-Ree or Karl Luke.