This decision confirms the need for franchisors to continuously monitor, evaluate and respond to employment law compliance risks across their franchising networks. Put simply, a passive “hope for the best” approach, or treating the franchising relationship as an arm’s‑length distribution arrangement between separate legal entities, is no longer sufficient and has not been sufficient since these laws were enacted almost 10 years ago.

The decision also makes clear that franchisors must take further positive steps to properly defend against accessorial liability claims. Sophisticated information systems, now a standard feature of most franchising networks, enable franchisors to readily monitor franchisee activity and identify emerging risks in real time, moving well beyond traditional reliance on periodic reporting, audits and contractual access rights. These characteristics are likely to satisfy the primary actual or constructive knowledge element for determining a contravention, and they may also be relevant when assessing whether the franchisor has influence or control over franchisee conduct and has taken reasonable steps to prevent contraventions.

It is worth noting that sophisticated information systems can be both a blessing and a curse; if information gathered is not acted upon, it may create an evidentiary trail that exposes the franchisor to greater scrutiny.

While franchising systems vary greatly in industry, size and required resources, some potential measures for franchisors to consider include:

a) conducting appropriate due diligence on franchise applicants to assess their knowledge and experience in employment law compliance. Implementing training and education programs before operations begin, particularly for new entrants, and throughout the franchise relationship, as is common among larger systems for various compliance topics, can significantly strengthen a franchisor's compliance framework;

b) where franchisee financial and other data is collected regularly for ongoing performance assessment and periodic industry‑wide benchmarking, consider establishing threshold or trigger indicators based on personnel costs, hours worked used to determine average cost rates, and other labour efficiency metrics. For example, in automotive franchising systems, such data and metrics may already be collected and analysed as part of aftersales operations revenue and efficiency studies;

c) reviewing and adjusting contractual obligations and other risk allocation mechanisms in the franchise agreement, and considering the inclusion of additional or enhanced provisions such as step‑in style rights; and/or

d) implementing a cooperative compliance culture, which may benefit both franchisors and franchisees. This could include making available relevant resources or service providers to address queries and potential issues before they escalate, such as hotlines. This may also help address concerns that accessorial liability could create a degree of moral hazard within the franchising relationship.

Franchisors should also be mindful that employment law compliance within their networks already forms part of the disclosure obligations and consequences set out in the Franchising Code. These include:

a) prior to and during the franchising relationship, the disclosure document provided to a franchisee or prospective franchisee requires disclosure of any current proceedings against the franchisor or an associate, or their directors, under sections 558B(1) or (2) of the Fair Work Act 2009 (Cth) (section 4(b) Litigation); and/or

b) throughout the franchising relationship, outside of the disclosure document, the Franchising Code requires franchisors to inform a franchisee or prospective franchisee of any proceeding by a public agency, or any criminal or civil judgment or arbitration award made against the franchisor or an associate, or their directors, in Australia that alleges a contravention of sections 558B(1) or (2) of the Fair Work Act 2009 (Cth). This obligation arises under section 34(2) of the Franchising Code, which concerns the disclosure of materially relevant facts relating to other matters.

It may be comforting for franchisors that, among the express termination rights for cause under the Franchising Code, section 58(1)(d) allows a franchisor to terminate a franchise agreement with seven days' notice where a court is satisfied that the franchisee has committed a serious contravention in proceedings for an order in relation to a Fair Work serious contravention of a Fair Work civil remedy provision (both as defined in the Fair Work Act 2009 (Cth)). However, due to the risk of lingering reputational damage and the additional disclosure requirements noted above, a proactive and preventative approach may be preferable to relying on the termination pathway.

If you have any questions about these obligations or would like advice tailored to your franchising arrangements, please contact our Corporate & Commercial team.