New Zealand: Franchisors concerned of accessorial liability for franchisee misconduct in Australia. Is there a similar climate for potential liability to exist in New Zealand?

The 7-Eleven case in Australia made international headlines in relation to the widespread exploitation of workers by a number of franchisees who were systematically failing to provide their workers with minimum entitlements. The breaches of minimum standards in this case were extensive and affected hundreds of workers who, in some cases, were being paid less than half of the relevant minimum wage.

While 7-Eleven was heavily criticised for failing to take steps that could have prevented breaches of minimum standards within its network, ultimately the decision was taken not to prosecute the 7-Eleven head office itself. That decision was taken on the basis that there was insufficient evidence to prove that the head office was knowingly involved in the breaches and therefore could not be held to be an accessory to them.

While the franchisor itself was not prosecuted, the 7-Eleven case did highlight the potential for liability to attach in this area and suggested that, in appropriate cases, franchisors may well be held to be liable as an accessory to the actions of individual franchisees. The owner of a 7-Eleven store in Brisbane was fined $400,000 for the systematic exploitation of its workers, the highest penalty ever given by the Fair Work Ombudsman (FWO). More litigation brought by the FWO is pending against other 7-Eleven store owners.

With that in mind, the question arises of whether a similar climate for potential liability exists in New Zealand.

Traditionally, franchisors in New Zealand have not been responsible for the conduct of individual franchisees that operate as separate legal entities. This is one of the obvious benefits of operating a franchise business model as it allows the franchisor to profit from the trade of the franchisee while remaining reasonably insulated from liability attaching to any misconduct by the franchisee. The franchisee is an independent business proprietor. In April 2016, however, the Employment Relations Act was amended to provide labour inspectors in New Zealand with significantly increased powers to deal with the issue of worker exploitation and enforcement of minimum employment standards (such as minimum wage and holiday pay entitlements).

These amendments included significant increases in penalties for parties found to be in breach of minimum standard entitlements and also included provisions that are similar in effect to the accessorial liability provisions of Australia's Fair Work Act. Specifically, the amendments provided the ability to hold "officers" of an employer liable for a breach of minimum standards by the employer. The term officer is not strictly defined but does include any "person" (which can be a company) in a position to exercise significant influence over the management or administration of the employer.

While it remains to be determined how the courts will interpret the new provisions of the Employment Relations Act, the wording does suggest that a franchisor that exercises significant control over its franchisees could well be liable for failure to comply with minimum standards. This would also seem consistent with the intent of the recent amendments in enforcing minimum standards by ensuring those in positions of power who knowingly participate in breaches can be held to account and, as such, franchisors should be taking steps to ensure that franchisees are complying with their employer obligations.

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