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FRANCHISING IN SAFETY

by Clayton Kimpton,
last updated 23/07/2009

Clayton Kimpton and Penny Hargreaves deliver a warning on the impact of health and safety legislation on franchises

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.

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.

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.

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'.

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.

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.

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.

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.

Manuals

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.

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.

  • Manuals should include clear warnings in respect of health and safety that franchisees must pass on to staff.
  • 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.
  • 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.

Impact

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.

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.

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.

ACC And Franchises

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.

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.

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.

Play Safe

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.

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.

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