In brief

A recent Fair Work Ombudsman (FWO) investigation into fast food giant Pizza Hut has identified widespread non-compliance with the Fair Work Act 2009 (Cth).

What you need to know

  • Following its audit, the FWO found that of the 32 Pizza Hut franchisees (Franchisees) audited, at least 24 were non-compliant.
  • Pizza Hut, whilst not involved in the actual non-compliance of its Franchisees, did not put adequate preventative measures in place.
  • There are a range of strategies that franchisors can utilise to prevent non-compliance on behalf of franchisees and/or limit liability in the event that non-compliance occurs.

Background

The FWO has estimated that Pizza Hut employees are owed over $12,000 in underpayments resulting from Franchisees misclassifying employees and/or incorrectly applying modern award rates and/or failing to increase pay rates in line with the Fair Work Commission’s annual minimum wage decisions.

As a result of the audit, FWO has issued three enforceable undertakings, 11 infringement notices, 11 compliance notices and 17 letters of caution, and it is considering pursuing further legal action against at least one Franchisee.

Interestingly, Pizza Hut sought to extract itself from the underpayments made by Franchisees on the basis that it had:

  1. engaged the services of an employee relations advisory business in 2009 to prepare pay summaries for industrial instruments which may have governed the terms and conditions of the workforces of the Franchisees; and
  2. forwarded the payment summaries to the Franchisees.

However, the FWO did not consider that Pizza Hut could extract itself entirely from the underpayments on the basis that:

  • the payment summaries did not contain any guidance on how Franchisees could determine the applicable industrial instrument which applied to their respective workforces;
  • Pizza Hut failed to have any adequate systems or processes in place to test whether Franchisees were complying with the relevant industrial instruments and/or following the pay summaries; and
  • Pizza Hut did not take steps to test whether Franchisees could remain profitable whilst complying with the relevant industrial instrument.

The FWO was additionally concerned that despite it having raised concerns regarding the misclassification of delivery drivers as independent contractors with Pizza Hut in April 2016, some Franchisees continued to advertise delivery drivers as independent contractors in online job advertisements.

Whilst the FWO did not find sufficient evidence of Pizza Hut’s involvement in any contraventions arising within Franchisees, it decided that the extent of the non-compliance was demonstrative of a pattern that Pizza Hut must address.

Now that Pizza Hut is on notice as to the non-compliant practices of its Franchisees, if it fails to adequately address the non-compliance identified, it is at risk of being held accountable as an accessory in any subsequent contraventions committed by its Franchisees. As such, moving forward, it will be imperative for Pizza Hut to gain a greater understanding of how its Franchisees are operating and exercising its leverage as head franchisor to ensure that the Franchisees are legislatively compliant.

Perhaps one of the biggest consequences of the above course of events is the damage to the entire Pizza Hut brand. It is likely to take some time – and much effort – before Pizza Hut can repair that.

What should franchisees do?

Franchisees should ensure that the pay and conditions of employees are in compliance with the National Employment Standards in the Fair Work Act 2009 (Cth) and the relevant industrial instrument. Further, where any non-compliance is identified, franchisees should ensure that it is immediately recited.

What should franchisors do?

While a franchisor cannot necessarily prevent all non-compliance instances on the behalf of franchisees, there are measures that can be put in place to make such instances less likely to occur and if they do, provide a level of protection to the franchisor in any FWO investigation.

One such strategy is assisting a franchisee with employment policies and processes from the outset to ensure that all franchisees are adequately set up and aware of their obligations as an employer.

One way we have seen franchisors do this is working with a law firm to develop a package of up-to-date template contracts, policies and procedures and/or training for franchisees.

Another strategy is to regularly audit franchisees to ensure that they are complying with their obligations as an employer.

Although these precautionary steps involve some up-front investment, in the end, given the potential costs involved in legal action and penalties (not to mention brand damage) it would appear to be a worthwhile investment.

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