Joint Employer Liability: Notes from Australia

With the growth of franchises in our service sector and others modes of operation whereby major brands and corporations (“user companies”) have, as some claim, “off-loaded” their labor needs to other businesses who supply labor and other services to them (“supplier companies”), attention has increasingly turned to the “joint employer” doctrine of U.S. labor and employment law. Under that fairly long-established doctrine, user companies are liable for violations committed by supplier companies only if they control or effectively determine the labor policies or practices of those entities. To the extent the user company is careful to avoid such control, it will not face joint employer liability. During the Obama administration, a number of labor unions attempted to expand the doctrine in a major challenge, before the National Labor Relations Board (“NLRB”), the agency enforcing the National Labor Relations Act of 1935 (“NLRA”), claiming that McDonald’s effectively exercised such control over franchisees’ employment practices in the name of providing uniform quality of service to customers across franchisees.

With the election of President Trump in 2016, the McDonald’s NLRB challenge subsided. In apparently an attempt to head off any similar challenge in the future, the Trump administration’s NLRB and Department of Labor (“DOL”), the federal agency which administers the Fair Labor Standards Act of 1938 (“FLSA”), have recently promulgated new joint employer rules which emphasize the requirement that the user employer must directly and actively control the supplier employer for there to be a joint employer relationship.

In this article, we take a look at the different approach Australia has taken in an analogous context—through the “accessorial liability” doctrine and additional obligations that are imposed on franchisors and holding companies. The accessorial liability doctrine is given life through § 550 of the primary Australian workplace statute, the Fair Work Act 2009 (Cth) (“FW Act”), which provides that where a person (including a corporation) violates a civil penalty provision of the FW Act, another person who is “involved in” that violation is taken to have also violated that provision. Supplementing § 550 are the recently enacted §§ 558A and 558B of the FW Act, where franchisors and holding companies who knew or ought to have known about a franchisee’s or subsidiary’s violation of the FWA Act, or a violation of the same or a similar character, are taken to have also violated that civil penalty provision.

This article comparatively analyzes these Australian provisions with the DOL and NLRB Rules.

I. The DOL Rule and NLRB Rule

The new DOL and NLRB rules provide tests of joint employment to be applied in the context of the FLSA and the NLRA, respectively.

1. Joint Employment Tests in the DOL Rule

The DOL Rule contains two tests of joint employment which apply to two different scenarios.

The first scenario arises where one employer “suffers, permits, or otherwise employs the employee to work,” but another “simultaneously benefits from that work.” The test in this scenario is whether the employee acts “directly or indirectly in the interest” of the purported joint employer. A four-factor test derived from the Ninth Circuit decision in Bonnette v. California Health and Welfare Agency is applied under this test. The four factors are whether the purported joint employer:

1. “Hires or fires the employee”;
2. “Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree”;
3. “Determines the employee’s rate and method of payment”; and
4. Maintains the employee’s “employment records”—as that term is defined in § 791.2(a)(2).

No factor is dispositive, and the weight given to each factor depends on the circumstances of each case. Additional factors may be relevant if they indicate whether the purported “joint employer exercises significant control over the terms and conditions of the employee’s work.” Proving the fourth “factor alone will not lead to a finding of joint employer status,” and economic dependence “is not relevant.”

The second scenario arises where one employer employs “a worker for one set of hours in a workweek, and another employer employs the same employee for a separate set of hours in the same workweek.” The test in this scenario is whether the employers are “sufficiently associated with respect to the employment of the employee” to render them joint employers. Sufficient association is “generally” proven if:

1. One employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or
2. There is an arrangement between those employers to share the employee’s services; or
3. The employers share direct or indirect control over the employee because one employer controls, is controlled by, or is under common control with, the other employer.

Under these two tests, a broad category of persons—including individuals, partnerships, associations and corporations—can potentially be found to be a joint employer under the FLSA.

2. Joint Employment Test in the NLRB Rule

The NLRB Rule contains a single test of joint employment. That test is whether the purported joint employer “share[s] or codetermine[s] the employees’ essential terms and conditions of employment” with another employer.

To satisfy this test, two requirements must be proven:

1. That the purported joint employer exercises “substantial direct and immediate control over one or more essential terms or conditions of” the employees’ employment, where:
   1. The essential terms and conditions are “wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction”;
   2. The meaning of “direct and immediate control” varies according to the essential term or condition in question, as per § 103.40(c). For example, in relation to wages it means determining employees’ “wage rates, salary or other rate of pay” or their “job classifications”, but not “entering into a cost-plus contract.” In relation to hours of work, it means determining employees’ “work schedules or work hours, including overtime”, but not “establishing an enterprise’s operating hours”;
   3. “Substantial” means that the control is exercised in a way “that has a regular or continuous effect on an essential term or condition,” and is not “exercised on a sporadic, isolated nor de minimis basis”;

and

2. That the purported joint employer’s exercise of such control warrants a “finding that the joint employer meaningfully affects matters relating to the employment relationship” of the employees.

The NLRB test appears more restrictive than the DOL tests. This is because of the narrower scope of control that must be: first, exercised substantially; second, exercised directly and immediately; and third, exercised over one or more of eight essential terms and conditions. Then, the second requirement must also be met, which apparently gives unguided discretion to the Board to essentially determine whether a finding of joint employment is warranted, even where the control factors in the first requirement are present.

II. Australian Multiple-Person Liability

There is no doctrine of joint employment as such in Australia. The doctrine has been considered, but the courts have not established it as law, and there is no statutory test of joint employment. Instead, quite oppositely, Australian law provides that an employee can only have one employer at any time.

However, the FW Act provides two statutory mechanisms for holding multiple employers and individuals liable for breaches of that Act: the accessorial liability provisions and the provisions imposing additional liability on “responsible franchisor entities” (“RFEs”) and holding companies (“HCs”).

1. Accessorial Liability Under § 550

There is a single test of accessorial liability, contained in § 550 of the FW Act. Section 550 states that a “person who is involved in a contravention of a civil remedy provision is taken to have contravened that provision.” A person means any “body corporate” (i.e., company) or “individual”—the latter including company directors, company employees, and professional advisors such as lawyers and accountants.

i. Meaning of “Involvement”

“Involvement” under § 550(1) is a term of art that is defined by the four subsections of § 550(2). Section 550(2) states that an accessory is involved in a violation where they have:

• aided, abetted, counselled or procured the violation; or
• induced the violation, whether by threats or promises or otherwise; or
• been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the violation; or
• conspired with others to effect the violation.

Unfortunately, Australian courts have not provided any detailed guidance about the differences between each of these four subsections, nor about what each requires to be proven—apart from obvious differences such as between proving a threat as opposed to a conspiracy.

Rather, the courts have consistently applied the leading High Court decisions on “involvement” under Australian law, Yorke v. Lucas and Giorgianni v. R, to determine liability under § 550. In Yorke, the Court held that for a person to be “involved” they must have “knowledge of the essential elements of the contravention”. In other words, the accessory must have knowledge of each and every element of the principal’s violative conduct. The “essential elements” required to be proven under § 550 vary according to the nature of the principal violation of the FW Act in question.

However, the High Court clarified in Giorgianni that the required knowledge is knowledge of, or belief in, the facts constituting the contravention, and does not require knowledge that those facts are actually a violation of the law. In other words, an accessory does not need to know that their, or the principal violator’s, conduct would be a violation of the FW Act.

So, for example, regarding this knowledge element, where an employee is underpaid by their principal employer in violation of the minimum wage provision (§ 293), to also hold an accessory liable it must be proven that the accessory actually knew that:

1. The employee was employed to do particular work; and
2. The amounts the employee was being paid.

However, it does not need to be proven that the accessory knew that the amounts paid were less than the minimum wage prescribed by § 293.

ii. How is Knowledge Proven?

Knowledge for the purpose of § 550 is actual knowledge. So, it must be proven that the alleged accessory had actual knowledge of the facts constituting the essential elements of the alleged violation committed by the principal. Constructive or imputed knowledge is insufficient. So, too, is proof that a person ought to have known of the essential elements of the violation.

However, actual knowledge may be inferred from the circumstances of the case. It cannot be inferred simply because the alleged accessory was negligent or reckless in failing to make necessary inquires. But, it can be inferred if a person is willfully blind— which occurs where a person gains actual knowledge of certain facts and then refuses to learn any more about them because they are “may be uninteresting or distasteful”.

So, for example, where an employee of a company that provides security services to a university is allegedly fired because he or she is a member of a union in violation of § 346, for the university to be accessorily liable it would need to be proven that the university:

1. Knew that employee was a member of a union; and
2. Knew that employee was going to be fired because of their union membership; and
3. Did nothing to prevent the firing (as § 550 applies to willful blindness).

iii. A to Z Catering: A Case Illustrating the A to Z of § 550

In Fair Work Ombudsman v. A to Z Catering Solution Pty Ltd (No 2), the sole director of a company called A to Z Catering Solution was sued by the Fair Work Ombudsman (“FWO”) for various violations of the FW Act. (The FWO—actually a woman at present, Ms. Sandra Parker—is an independent enforcement body set up under the FW Act to investigate alleged breaches of, and enforce compliance with, the FW Act. It is analogous to the Wage and Hour Division of the DOL in the U.S. The FWO is empowered to bring suits against persons for violating the civil penalty provisions of the FW Act, including accessories.) The Court found that the director was accessorily liable under § 550 and fined $AU 50,100.

The Court found that the director had knowledge of the essential elements of the violations. For example, in relation to the failure to pay accrued annual leave in violation of § 44(1) of the FW Act, the essential elements were held to be that:

• The relevant employees worked and therefore accrued annual leave;
• The employees did not take any annual leave;
• The employees’ employment ended; and
• The company failed to pay the employees any amount for accrued annual leave at the time their employment ended (as is required by §§ 44 and 90(2)).

In relation to the failure to provide employees with pay slips in violation of § 536 the essential elements were held to be that:

• Each of the relevant employees performed work;
• Each of them was paid for the work he or she performed; and
• None of them was provided with a pay slip within one working day of payment (as is required by § 536).

The Court found that actual knowledge of the above was established by evidence including that the director was:

• Directly involved in the engagement of the employees;
• Aware that the employees completed time sheets;
• Directly involved in paying the employees;
• Regularly monitoring the employees’ rosters;
• Responsive to the employees’ enquiries about their pay; and
• The person who dealt with the FWO when it made enquiries about the employees’ pay.

This case shows how the essential elements of a violation are identified, and vary according to the nature of the violation in question. It also shows how actual knowledge may be proven under § 550. While this case involved an individual, the same methodology applies to entities such as companies (although knowledge of company officers and agents may be imputed to companies).

2. Additional Liability of Responsible Franchisor Entities and Holding Companies under §§ 558A and 558B

In 2017, the Australian Government amended the FW Act after prominent underpayment cases involving franchises such as 7-Eleven, Dominos and United Petroleum stimulated “increasing community concern about the exploitation of vulnerable workers”.

Sections 558A and 558B were inserted into the FW Act. They impose liability on “responsible franchisor entities” (“RFEs”), which includes most franchisors, for violations of the FW Act committed by their franchisees. The provisions do the same for “holding companies” (“HCs”) n relation to violations committed by their subsidiaries.

Due to its youth, § 558B has not been meaningfully considered by Australian courts. There has only been one case, decided on May 7, 2020, which mentions the provision. However, it does not give detailed consideration to the effect of this provision because the case was decided on another issue.

Section 558A sets out the definition of a RFE and § 558B sets out the requirements for proving the accessorial liability of a RFE or HC. Section 558B supplements § 550 of the FW Act so a RFE or HC can be sued for violating both provisions. As is the case with § 550, a RFE or HC may be liable even if no suit has been brought against the relevant franchisee or subsidiary.

The test for imposing liability on RFEs and HCs is different from the test under § 550. Essentially, a RFE or HC is liable for a violation committed by one of its franchisees or subsidiaries, if it knew or ought to have known about that violation, or a violation of the same or similar character. A RFE or HC can avoid such liability if it proves that it took “reasonable steps” to prevent a violation by the franchisee or subsidiary of the same or similar character.

The precise requirements of proving the liability of a RFE or HC under §§ 558A and 558B are set out in the two-step tests relating to each below.

i. Proving Liability of a Responsible Franchisor Entity

The first step is proving an entity’s RFE status requires a showing that:

1. There is a “franchise”—defined as an arrangement by which an entity earns income by exploiting a right to “use a trade mark or design or other intellectual property or the goodwill attached to it”; and
2. The entity is a franchisor or subfranchisor of that franchise; and
3. The franchisee who committed the violation of the FW Act has a business which is “substantially or materially associated with intellectual property relating to the franchise”—for example, by using a logo, trade mark or brand marketing; and
4. The franchisor or subfranchisor “has a significant degree of influence or control over the franchisee’s affairs”. This important term is not defined in the FW Act, but the FWO has stated it includes the franchisor’s actual exercise of control, and reserved rights of control over the franchisee’s “financial, operational and/or corporate matters,” such as, for example, over matters such as trading hours, sales targets, staffing levels and incurring business expenses.

The second required step focuses on the conduct of the relevant RFE, or a reasonable RFE in its position, by requiring proof that the RFE or its corporate officers either:

1. “[K]new or could reasonably be expected to have known” that the franchisee’s violation would occur; or
2. At the time of the franchisee’s violation, “knew or could reasonably be expected to have known” that a violation of the “same or similar character” as the franchisee’s violation was likely to occur.

A defense to liability is available to the RFE under § 558B(3). This requires the RFE to prove that, at the time of the franchisee’s violation, it took “reasonable steps to prevent” a violation of “the same or a similar character.” To determine whether reasonable steps have been taken, “a court may have regard to all relevant matters.” § 558(4) lists matters that may be considered—for example, the “size and resources of the franchise” and extent to which the RFE had the “ability to influence or control” the franchisee’s violative conduct. The FWO has also suggested that reasonable steps involve RFEs actively monitoring their franchisees’ compliance with workplace laws; assisting franchisees in complying with the law; and establishing channels for direct communication between franchisees’ employees and RFEs.

ii. Proving Liability of a Holding Company

Almost identically to proving a RFE’s liability, a two-step test is required to prove a HC’s liability for a violation committed by its subsidiary.

The first step is proving HC status, by showing that the HC either:

1. Controls the composition of the subsidiary’s board; or
2. Is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at the subsidiary’s general meeting; or
3. Holds “more than one-half of the issued share capital” of the subsidiary.

It is important to note that once HC status is proven, all subsidiaries of the subsidiary are also considered to be subsidiaries of the HC, which means that a HC may be liable for violations committed by those subsidiaries.

The second step requires proof that the HC or its corporate officers either:

1. “[K]new or could reasonably be expected to have known” that the subsidiary’s violation would occur; or
2. At the time of the subsidiary’s violation, “knew or could reasonably be expected to have known” that a violation of the “same or similar character” as the subsidiary’s violation was likely to occur.

The same “reasonable steps” defense set out above in relation to a RFE is available to a HC under § 558B(3).

iii. Comparison of § 558B and § 550

When compared to § 550, these new provisions:

• Introduce objective elements to the liability inquiry (e.g., with the words “reasonably be expected” and “reasonable steps”), rather than relying on a purely subjective test of liability;
• Impose a lower standard of knowledge by requiring actual or constructive knowledge, instead of actual knowledge (as is required by § 550);
• Create liability simply where an RFE or HC knew, or ought to have known, about a violation of the same or similar character, as opposed to knowledge of the precise violation which the franchisee or subsidiary committed under § 550; and
• Shift the evidentiary onus onto the relevant RFE or HC to prove a defense that they took reasonable steps, whereas under § 550 the plaintiff bears the evidentiary onus of proving involvement and the defendant has no defense.

III. A Comparative Note

1. Is Actual Control By One Company Over Another Required in Australia?

The recently enacted §§ 558A and 558B of the FW Act require control of one company over another to establish RFE or HC status (i.e., the first step of the tests set out above). However, the analysis of control is much broader than that required by the DOL and NLRB Rules, as it encompasses actual control, indirect control, and reserved rights to control.

Because the Australian accessorial liability provisions focus on the second company’s “involvement” in the first company’s violation, there is not the same emphasis on the question of control of one company over the other, as is true of the NLRB and DOL Rules and for establishing RFE or HC status. Rather, the focus is on the intentional involvement of the accessory in a specific violation. This means that actual control, indirect control, and reserved rights to control are all relevant, and can be used to prove the intentional involvement of an accessory in a violation (and therefore, liability), but are not required.

All of these forms of control are similarly relevant and can be used to prove that a RFE or HC knew or could be reasonably be expected to know about a violation committed by its franchisee or subsidiary (i.e., the second step of the tests above). This second step diverges from the NLRB and DOL Rules because it provides RFEs and HCs with a “reasonable steps” defense that compels such entities to actually exercise control over their franchises and subsidiaries, by taking reasonable steps to avoid liability. In this regard, it is interesting that the efforts of RFEs or HCs in taking reasonable steps may save them from liability under § 558B, but those steps may actually lead them to be held to be sufficiently involved in a contravention to be liable under § 550. It is unclear how the courts will treat this tension.

2. Treatment of Business Models such as Franchises

The DOL Rule and NLRB Rule explicitly refer to, and purportedly render irrelevant, specific business models in the joint employment analysis. For example, the DOL Rule states that certain business models such as “[o]perating as a franchisor”, “entering into a brand and supply agreement, or using a similar business model” do not make “joint employer status more or less likely” under the FLSA. Similarly, the NLRB Rule states that a franchisor’s protection of its trademark or service mark, and the maintenance of brand recognition standards such as a requirement to wear a franchise uniform, do not evidence joint employment—therefore making it less likely for a franchisor to be a joint employer. In any case, the current DOL Rule and NLRB Rule make it difficult to hold franchisors liable as joint employers, because they focus on actual control over the labor and employment practices of the franchisee which may not be present in many franchise relationships. Therefore, if upheld by the courts, the current rules appear to make it less likely that suits seeking to impose franchisor liability, such as the recent unsuccessful Dominos and McDonald’s class actions, will be successful in the future.

Australia’s recent experiences of franchisors avoiding legal liability for their franchisees’ violations of workplace laws has led legislators to target franchisors and HCs. Through the combined effect of §§ 550 and 558B, franchisors and HCs are now held to a higher standard of conduct than other entities. The objective elements in the test of liability, the extension of liability to violations of the same or a similar character, and the reasonable steps defense, are particularly demanding. They shift the responsibility onto RFEs and HCs—if the control element for establishing RFE or HC status is satisfied—to proactively monitor their franchisees’ and subsidiaries’ compliance with the FW Act, and assist them to comply.

* * *

The Australian mechanisms for holding multiple employers liable for breaches of workplace laws, particularly §§ 558A and 558B of the FW Act, provide food for thought for U.S. companies, regulators and legislators about how to appropriately regulate the growing trend of user companies to offload their labor needs and concomitant responsibility to supplier companies.