Why is the New York Law Journal publishing an article on the joint employer liability issue in the United States and Australia? Because this issue, which has been THE hot issue in U.S. franchise law for several years, has also shown its face in Australia during this period, and is now the headline legal issue in Australian franchising as well.

In the United States, the issue has been raised in three contexts: (1) judicial, (2) administrative, and (3) legislative, and has arisen at both the federal and state levels. With respect to litigation, there have been mixed results for litigants. Most of the cases in the United States in the franchise context have involved the issue of whether a franchisor can be liable for the sins of its franchisee or for the franchisee's obligations. In its broadest sense, the joint employer liability issue is essentially a subpart of vicarious liability and is generally nothing new. It arises in the tort context where, for example, a visitor to a restaurant slips and falls and the plaintiff claims that for various reasons, the franchisor should be held accountable for the plaintiff's injury. In the contract context, there may be justification for holding the franchisor liable because the franchisor has led the party claiming joint employer status to believe that the franchisee is an alter ego to the franchisor by reason of name usage, contract, guaranty and so forth. These are only a couple of examples of how a franchisor has been taken into the fracas. The cases themselves are typically very fact specific, making it difficult to determine how the franchisor can minimize its exposure. (The current status of the joint employer liability issue in the United States is covered in “What's New and What's Next: The New Administration and Beyond,” which was presented by Rupert Barkoff, Susan Grueneberg and Carl Zwisler at the American Bar Association's Forum on Franchising, held in October 2017.)

In recent years, the joint employer issue has also arisen when the franchisee has failed to pay its workers' compensation obligations or has failed to pay its sales taxes, and thus the courts have had to consider whether these are situations where the franchisor must be responsible for the payments of these obligations.

In the area of administrative law, during the Obama years, the Department of Labor aggressively pursued the theory that the franchisor should be held liable for the franchisee's sins in labor and employment matters because the franchisor has been actively involved in the franchisee's employment operations, such as the establishment of wages, supervising employees, or involvement in the hiring and firing functions. Historically, in labor and employment matters, the test for joint employer liability had been based upon the level of control the franchisor has assumed in the operations of the franchisees. Under the Obama administration, the Department of Labor had broadened the test to require a look at the economic realities of the structure of the business under examination, which include more than just the issue of control. However, when the Trump administration came to power, the direction of the government in trying to assert joint employer liability on franchisors returned to the previous position established by the courts and government.

And finally, in the legislatures the joint employer issue has become the focus of some laws that limit the liability of a franchisor for the conduct of its franchisees. In Texas, for example, the Texas legislature has adopted an act which specifically makes franchisors not jointly liable for the conduct of franchisees in some circumstances. In California, the state legislature has enacted bills that have gone in the other direction. At the federal level, there have been proposed bills both for and against a broader scope on this issue, but nothing enacted.

Although in Australia there have been proponents for significantly broadening the scope of joint employer liability for years, it was only about two years ago that the issue came into the spotlight. In a 2015 television expose, the television station showed that in the 7-Eleven system, it was a common occurrence for franchisees to either demand that employees not record all of the time they worked, or require the employees to pay kickbacks to the franchisees. In the no-record-all-time scenario, the problem was created in part by the fact that many 7-Eleven employees were foreign students who had come to Australia to continue their studies, and their visa only allowed them to work so many hours per time period. Thus, by not requiring these students to record all of their time, the franchisees could pay them something under the table, and at amounts below applicable wage rates. This conduct would not appear in the franchisees' records.

The kickback scheme stems from blackmail, where the franchisees threatened to turn in illegal immigrants, which, if the threat were carried out, would cause them to be deported.

In either case, these practices were illegal under Australian labor and employment laws (and would also have been illegal under U.S. labor and employment laws). A critical fact in the 7-Eleven situation was that the franchisor allegedly knew of the franchisees' conduct and turned a blind eye.

While there are other Australian franchisors who had also turned their back on the problem, 7-Eleven ended up in the spotlight, in part, because its CEO was also the Chair of the Franchise Council of Australia—the equivalent of our International Franchise Association. He was forced to resign from this position as well as from his position with 7-Eleven, leaving the FCA the task of cleaning up the mess that had been created in the franchise sector of Australia. It is reported that so far, 7-Eleven has paid approximately AU$150 million in settlements.

As a consequence of the conduct of 7-Eleven and other franchisors, the Australian Parliament promptly adopted legislation addressing the problem that surfaced from 7-Eleven's misconduct. One notable difference between the U.S. and Australia legislative and administrative processes is that the Australians seem to be able to act much more quickly when changes are needed. For example, it took the Federal Trade Commission over seven years to amend its franchise rule in 2007. In contrast, in the 7-Eleven situation, legislation was enacted within two years after the problem became spotlight news. Parliament's response was the enactment of the Vulnerable Employee Act (VEA), which, among other things, prohibited not only the conduct seen in the 7-Eleven situation, but other conduct that the Australian Parliament felt inappropriate, such as:

• Unreasonable deductions of amounts from amounts owed to employees

• Unfair dismissal of an employee

• The bullying of a worker at work

• The unlawful discrimination of a person in relation to employment

• The coercion of any employee by an employer

If you closely examine the VEA, you would discover that the Act focuses on franchisor conduct when the franchisor knows or has reason to know that its franchisees' conduct contravened (i.e., violated) Australian law. The Act appears to provide a prophylactic approach to solving the employment problems in the Australian marketplace. It strongly encourages franchisors to educate its franchisees about the Australian employment laws, to have franchisees stop violating these laws, to maintain complete and accurate records, to monitor franchisee compliance, and, when appropriate, take necessary steps, including termination, if the franchisees fail to comply. Franchisors are also encouraged to audit their franchisees on employment matters. What an audit might include is not clearly defined, but it seems clear that it does not require mid–to-large franchisors to audit every franchisee every year, but the burden will be on the franchisor to prove that the steps it has taken to prevent contraventions by franchisees are reasonable. The franchisor will not be liable for franchisee obligations unless it knew or should have known of the contraventions. The act imposes hefty fines on franchisors who do not comply. The Act also indicates that the franchisor is entitled to reimbursement from franchisees for any sums it must pay as a result of the franchisees' contraventions.

One of the ironies one discovers when comparing the Australian and United States joint employer situations is that some of the conduct that an Australian franchisor must take in order to fulfill its obligations under the VEA would, in a U.S. context, probably result in the U.S. franchisor being deemed a joint employer. Presumably, the VEA compliance would not, in itself, create joint employer liability in Australia.

Although it seems obvious that the VEA would be applicable to all franchise agreements signed subsequent to the effective date of the VEA (October 2017), the Act does not address the problem of how to deal with previously existing franchise agreements. Like their U.S. counterparts, most, if not all, credible Australian franchise agreements provide that franchisees must comply with all applicable laws, regulations and ordinances. Would the Act provide sufficient grounds to give franchisors the right to police and take appropriate steps to correct errant practices? Many franchisors are concerned about the extent to which they can intrude or monitor franchisee behavior without upsetting the business relationships between franchisors and their franchisees, or any other laws such as those protecting privacy.

And one final note. In Australia, it is very common to have three-level franchise systems—that is, the franchise system structure includes: (1) franchisor, (2) subfranchisors or regional agents or intermediaries, and (3) franchisees. With respect to these three-tier systems, who has the responsibility to audit and take corrective measures necessary to ensure VEA compliance by system franchisees or subfranchisees? In the United States, three-level franchise systems are not as common as they are in Australia, but their popularity seems to have increased over the last one or two decades. Thus the joint employer liability issue has only recently become a more common and more complex problem in the United States. For an interesting U.S. case where the franchisor was not found to be a joint employer but did not exclude the possibility that the regional master franchise regional agents were joint employers (the masters were not parties to the suit), see Roman v. Jan-Pro Franchising International, 2017 WL 2265447 (N.D. Cal. May 24, 2017.

For Australian franchisors who have played by the rules all along, the Act probably does not increase their liability resulting from the VEA's requirements, but it will create record keeping and compliance costs. For those who have not been historically, compliant, franchisors must be more vigorous in monitoring its franchisees' conduct; otherwise, it may incur substantial exposure to fines and possible civil litigation. In the United States, it is too early to predict what the law on joint employer liability will be in the near future.

Had he been asked his opinion as to what the consequences of the VEA would be in Australia, and in what direction will joint employer liability in the United States take, Chicken Little might have said to not be an alarmist and shout that the sky is falling. But in both countries, it may be time to reflect on the franchise model and ask if there is a better way to do business?

Rupert M. Barkoff is chairman of the franchise practice of Kilpatrick Townsend & Stockton. He was also the co-creator and co-editor-in-chief of “Fundamentals of Franchise,” a primer on franchise law published by the American Bar Association's Forum on Franchising.