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NEW SAFETY LEGISLATION ADDS
COMPLICATIONS FOR FRANCHISES


last updated 17/06/2015

December 2014 - Changes in health and safety could be costly for franchisors and franchisees, suggests Nathan Tetzlaff of Gaze Burt

Health and safety legislation is due for a shake-up in 2015. There are a wide variety of changes likely to be implemented and some of these will have a particular impact on the way franchisees and franchisors do business. The news came as a nasty shock to some of the people at a franchise gathering in Auckland recently, so it’s important that everyone has a clear understanding of what the changes mean, and reviews their processes and procedures accordingly.

The Health and Safety Reform Bill is scheduled to come into law in April 2015 and is a response to the Pike River Commission of Inquiry report. This report made 16 recommendations, most of which were primarily relevant to the mining sector. However, there were some recommendations with wide ability. In particular, the report recommended that:

1. A Crown agency dedicated solely to health and safety in the workplace be established,

2. The responsibility of directors and managers for health and safety in the workplace should be reviewed to better reflect their governance responsibilities, and

3. Health and safety duties under the Act should be more prescriptive, and further specific regulations are needed.

This first recommendation has already been implemented with the creation of WorkSafe New Zealand. The upcoming changes address the remaining two recommendations.

Differences between the current law and the Reform Bill

Health & Safety in Employment Act 1992

Health & Safety Reform Bill 2014

Primary duty holder is the employer (s6) or principal (s18)

Primary duty holder is the Person Conducting a Business or Undertaking (PCBU – see below) (cl 13)

Duty of care: take all practicable steps to ensure the safety of employees (s6) or contractors (s18)

Must ensure, so far as reasonably practicable, that the health & safety of other persons is not put at risk (cl 30)

Focus is on identifying and eliminating hazards (s7)

Focus on eliminating risks to health and safety (cl 22)

No consultation duty

Duty of consultation (cl 27)

No liability on officers and individuals in senior management

New ‘due diligence’ duty for officers and individuals in senior management

Low impact penalties

Significant new penalty regime

 The Primary Features of the Bill

The Reform Bill uses new key terms. The major change is in the primary duty holder which is a new category, the PCBU. This stands for Person Conducting a Business or Undertaking. This category covers almost all businesses and associations, with the exception of volunteer associations (which have no employees) and an occupier of a home (to the extent that the occupier employs or engages another person solely to do residential work).

The PCBU is where ultimate responsibility lies. It must ensure, so far as reasonably practicable:

  • the health and safety of workers, and others affected by the work;
  • that the workplace is without risks;
  • that plant and structures are safe;
  • that safe systems of work are provided and maintained;
  • the provision of adequate facilities for the welfare of workers;
  • the provision of any information, training, instruction, or supervision; and
  • that the health of workers and the conditions at the workplace are monitored.

PCBUs that supply goods to workplaces (for instance, leased machinery), or control goods after supply (such as an ongoing maintenance contract) may also assume responsibilities in those workplaces in relation to those goods.

You must consult

A key part of the Reform Bill is a general emphasis on consultation. PCBUs are required to consult with their workers, and where there is more than one PCBU in a workplace the PCBUs are required to consult with each other to ensure that they each understand who is responsible for particular aspects of health and safety.

Officers are liable

The second major change is the establishment of personal liability for ‘officers’ of a PCBU. An officer is a company director (or anyone comparable), a partner in a partnership, and anyone else who makes decisions that affect the whole, or a substantial part, of the business of the PCBU (for example, the chief executive).

Officers will have personal liability to exercise due diligence to ensure that the PCBU complies with its duties or obligations.  This requires an officer to do things such as keep up-to-date knowledge of work health and safety matters, gain an understanding of the nature of the operations of the PCBU and the hazards and risks associated with those operations, and to have processes in place for the PCBU to comply with its obligations and receive information regarding incidents, hazards, and risks. In other words, the officer is required to ensure that the PCBU has appropriate health & safety policies and follows these. If a PCBU does not have adequate health and safety policies in place, then it’s very likely that this will be a breach of the law by both the PCBU and the officer (personally).

The duties outlined above are just a selection of the many duties on PCBUs, officers and others set out in the Health and Safety Reform Bill.

Increased penalties

A third major change is the amount of the penalties available. In the case of reckless conduct exposing someone to the risk of death or serious injury (without any death or serious injury even needing to have occurred), the maximum available penalties are:

  • $3,000,000 maximum (body corporate/other).
  • $600,000 maximum (officer of PCBU).
  • $300,000 maximum (individual who is not a PCBU or officer).

There are a range of less severe penalties available for less harmful breaches (such as a $25,000 fine for failure to keep records of notifiable events (accidents) and a $100,000 fine for failure to consult with other duty-holders in a workplace).

Limited insurance possible

One thing that stays the same is that it is not possible to insure against fines for breaches of health and safety law. In most cases, if there is a prosecution and a penalty against a PCBU, part of this penalty will be reparations to the victim of the accident, and part will be a fine paid to the Crown. Only the ‘reparations’ part of the penalty can be insured against, as well as the PCBU or officer’s legal costs defending a claim.

It is important to ensure that your insurance does not pay reparations and legal costs out of the same pool of funds. There is a risk that the reparations will be paid first and only what is left over (if anything) can be used to cover legal costs. To avoid this, it’s prudent to have separate insurance for reparations and legal costs.

Impact on franchises

Franchisors are PCBUs in respect of their own businesses, just as franchisees are PCBUs in respect of theirs. However there is a real risk that the Reform Bill goes much further than this. In a cabinet paper titled ‘Regulatory Impact Statement: Improving New Zealand’s Workplace’ it is observed that ‘The PCBU approach extends the primary duty holder to include businesses who do not directly engage employees, such as licence owners and franchisors. (our emphasis)

In the ‘Health and Safety Reform Bill Update September 2014’ prepared by WorkSafe, an example given of PCBUs included a fast food franchisor and the operator of the fast food outlet (the franchisee). In that publication there was the comment that ‘The PCBU concept recognises that a business or undertaking has an influence over the health and safety of workers, even where those workers may not be its direct employees.’

It is clear from the regulatory impact statement and the update that the government is aware of the possibility that franchisors may be PCBUs in respect of a franchisee’s business, and is content to allow this. Traditionally, a key part of the franchising arrangement has been the importance of separating the businesses of the franchisor and franchisee. In almost every case the intention is that a franchisee is clearly and distinctly operating their own business. This distinction may now be blurring, at least as far as health and safety is concerned. The courts will have to grapple with the question of whether a franchisor is seen to be ‘conducting’ a franchisee’s business.

Franchisors as suppliers

Certainly, a franchisor will be liable as a PCBU where it supplies goods or equipment to a franchisee – for instance, where a cafe is supplied with coffee machines and beans by the franchisor or a cleaning franchisor provides chemicals to its franchisees. In relation to those machines, beans and chemicals the franchisor will be a PCBU, even if it is not a PCBU over the whole of the franchisee’s operation. At the very least this triggers the obligation between the franchisor and franchisee PCBUs to consult with one another about health and safety matters in their overlapping businesses.

What’s in the manuals?

Another area where a franchisor could be liable in relation to a franchisee’s business is in the provision of health and safety policies. If the franchisor takes it upon themselves to dictate any aspect of health and safety requirements then this could open the door for a prosecution in the event that those health and safety obligations were inaccurate or incomplete. This might result in franchisors trying to stay out of their franchisee’s health and safety compliance, but the risk is that being too hands-off could cause a franchisor to incur liability if it were found that it should have taken responsibility for a particular aspect of health and safety. A franchisee might also complain that they were not given enough direction by a franchisor if health and safety did not form part of the initial training.

Any publicity is good publicity?

Another risk in the context of franchising is one of the penalties available to the Court, which is an ‘Adverse Publicity Order’. The Court can require notification by an offender of the offence, its consequences, the penalty imposed, and any other related matter. In theory, this is a good deterrent against health and safety breaches, but in the context of franchising it could do considerable damage to the franchisor and the wider brand. We are optimistic that the court would be careful in the use of this order and would not grant it where third parties could also be affected.

For the Future

The new obligations in the Reform Bill are far too numerous to be examined in detail here, and it’s not clear at this stage how they will be interpreted and how widely they will be imposed. We are hopeful that good sense will prevail and health and safety will not be used to derail one of the keys ideas behind franchising – that the franchisee is operating a separate business.

There are also a wide range of alternatives to financial penalties which can be imposed, including improvement notices and enforceable undertakings. We trust that in the early stages at least, the focus of the regulator will be on education and improvement rather than penalising and shaming businesses. That said, franchises that take a relaxed approach to health and safety will need to improve their compliance or risk significant consequences for the business and its officers.

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