Clayton Kimpton is a partner and Penny Hargreaves a solicitor with Gaze Burt, Barristers and Solicitors in Auckland.
Clayton Kimpton
<p class="content">
Although we have no franchise legislation in New Zealand, franchises
are, of course, subject to the same laws relating to all businesses.
The franchisor/franchisee relationship is a complex one, however, and
sometimes the implications of legislation as applied to that
relationship may not be obvious. Health and safety legislation and the
ACC are areas which can have significant importance for both parties.
</p>
<p>Although the issue of whether a franchisor can be liable for an
injury to a franchisee's employee has not yet been directly addressed
by the courts, cases to date give a clear picture of the manner in
which a decision may be determined.
</p>
<p>The Health and Safety in Employment Act 1992 aims to ensure that
employers operate safe businesses both for employees and for all those
who enter and use the workplace. The obligations imposed under the Act
are basically for employers to remove, minimise or isolate possible
hazards in the workplace so that health and safety risks are
eliminated, or at least minimised where total elimination is not
possible.
</p>
<p>Franchisees are often employers, and are therefore subject to the
Act in providing a safe workplace for employees. Health and safety
legislation does not, however, vest responsibility for maintaining a
safe workplace solely on the employer or franchisee. The Act also
extends responsibility to 'principals'.
</p>
<p>Although there have not yet been any specific instances of
franchisors being found to have principal liability, if we accept that
the franchise relationship is one with mutual gain and reward then a
franchisor may fit into the category of a principal as defined by the
Act. Mutual gain and reward exists most basically by the franchisor
promoting and extending the franchise system and setting standard
procedures. The franchisee pays a premium to the franchisor for those
services and benefits by advertising of the franchise name and by using
the established procedures of the franchisor. Given this reciprocal
process, it is arguable that the Act may extend to franchisors as
principals. </p>
<p>
The liability of principals is determined under section 18 of the Act,
and several recent court decisions have given some clarification in
this area. The most significant decision was in the Central Cranes case
(Central Cranes Ltd v Department of Labour CA147/97) as determined by
the Court of Appeal. In this case the Court of Appeal held that
although the employer (whom for our purposes we may think of as the
franchisee) holds primary responsibility for workplace safety, this
does not diminish the responsibility on others on whom the statutory
duty is imposed.
</p>
<p>The Central Cranes decision determined that under section 18 the
duty on principals (franchisors, for our purposes) required that all
reasonably practical steps be taken in the circumstances to ensure that
no employee of a contractor (franchisee) is harmed while doing work for
the contractor (franchisee). The requirement on a principal
(franchisor) may therefore require positive or restraining acts (ie.
the setting out of do's or don'ts) or both, depending on the type of
work and the possible health and safety risks.
</p>
<p>The franchise agreement often stipulates particular machinery or
equipment in order to perform particular jobs. Where franchisors make
such requirements of their franchisees, the franchisors need to ensure
that the proper health and safety procedures relating to that machinery
are made available to franchisees. Furthermore, franchisors should
check that the procedures are followed. Franchisors who fail to take
these steps where they have a high degree of control over the product
being used in the workplace could open themselves up to liability for
any health and safety issues arising.
</p>
<h2><a name= 'Manuals'>Manuals</a></h2>
<p>Many franchisors provide manuals outlining required policy and
operating procedures for the franchise. Such franchisors are clearly
trying ensure consistency among franchisees by offering guidelines for
them to follow. In order to meet the statutory obligations, franchisors
need to ensure that these guidelines are being followed in the area of
health and safety. The greater the level of control the franchisor is
perceived to have over the behaviour of the franchisee, the more likely
the franchisor is to become liable for health and safety risks.
</p>
<p>Franchisors consequently need to take care in drafting manuals for
franchisees, and to ensure that manuals are updated if systems change,
equipment is updated or if there are any relevant law changes.
</p>
<ul><li>Manuals should include clear warnings in respect of health and safety that franchisees must pass on to staff.</li>
<li>Franchisors who include in manuals sample employment contracts
or employment terms for franchisee staff need to ensure that these have
clear health and safety provisions.</li>
<li>Health and safety provisions should alert the individual
employee to their personal responsibility in respect of following the
health and safety procedure of the workplace, and in alerting the
employer to any relevant issues which become apparent.</li>
</ul>
<h2><a name= 'Impact'>Impact</a></h2>
<p>
In view of these responsibilities, failure by the franchisor to update
policy and monitor everyday practice could prove a false economy if
significant breaches occur. A decision against a franchisor as
principal would be costly, and the ACC implications could affect all
franchisees in the group (see below). The franchise name could also
suffer from negative publicity. Franchisors and franchisees therefore
need to work together to ensure health and safety risks are eliminated
where possible and minimised where not.
</p>
<p>It is also possible that the franchisor could be held responsible
for a breach whether or not the employee or franchisee is also held
responsible. Franchisors therefore need to be aware of the implications
of their franchisee's workplace management.
</p>
<p>The Act also places some responsibility on owners of premises. Where
franchisors lease premises to franchisees, they are broadening the
control they are able to exert over the workplace and are subject to
similar obligations imposed by the Act on landlords. Franchisors should
check how this can further heighten their health and safety
responsibilities.
</p>
<h2><a name= 'ACC And Franchises'>ACC And Franchises</a></h2>
<p>Another aspect of health and safety that needs to be considered is
the Accident Rehabilitation and Compensation Insurance Act 1992. Under
this legislation, employers pay a premium to ACC based on the
'experience rating' of their business. This experience rating is
affected by the number of accidents in the individual workplace in
relation to the claims made to ACC. Premiums can be very high and a
significant cost to the business.
</p>
<p>ACC is not, however, limited to looking at the individual business
in order to determine the experience rating. They can consider other
employers within the same industry who are substantially similar in
their work practices. This obviously impacts upon a franchise, as
franchisors usually aim for consistency of practice among franchisees.
</p>
<p>Franchise manuals and other guidelines are part of achieving a set
franchise standard. If a franchisee has significant health and safety
risks or breaches, these could impact on the experience ratings of all
the other franchisees in the group as their practices could be
considered substantially similar. A high experience rating would mean
high premiums and lower profits all round, and discourage prospective
franchisees too.
</p>
<h2><a name= 'Play Safe'>Play Safe</a></h2>
<p>In summary, franchisors should closely monitor franchisees to ensure
that they have sound health and safety procedures in place. A
substantial breach of health and safety requirements could subject to
penalties not only the franchisee concerned but also, as principal, the
franchisor. If an injury occurs and ACC becomes involved, the
implications can affect all the other members of the franchise through
a higher experience rating.
</p>
<p>In short, both Health and Safety and ACC legislation can prove
costly to a franchise system, and neither franchisors nor franchisees
can afford to treat their obligations lightly in these areas. It is
recommended that franchisors have their manuals and systems regularly
audited for these issues, and that they ensure a check is maintained on
the franchisees' compliance with the set systems and procedures. </p>
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<author>Clayton Kimpton and Penny Hargreaves</author> deliver a warning on the impact of health and safety legislation on franchises
2009-07-23
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