Employment law proposal exempts some franchisees but still has hooks

A new report from the Transport and Industrial Relations Select Committee on Part 6A of the Employment Relations Act was released yesterday. The report specifically addresses franchise issues and recommends significant amendments to the contentious ‘Associated Persons’ clauses, but one franchisor is already expressing concern that further clarification will be needed.

Part 6A requires that, in the event of, eg. a cleaning contract changing hands, employees of the outgoing contractor would have the right to transfer to the new contractor on the same terms and conditions of employment. This clearly affects the ability of the new contractor to bring in their own team of cleaners.

Originally, the proposed changes suggested that businesses with fewer than 20 employees would be exempt from Part 6A when they took over a new contract. However, the Government proposed to create a new class of ‘Associated Persons’ to be taken into account when tallying up the number of employees. This stated that where the incoming contractor was a franchisee, both the franchisor and franchisee must employ fewer than 20 people between them in order to claim exemption. (see summary here)

Following strong lobbying by the Franchise Association of New Zealand, this proposal has now been changed. The report recommends that franchisees should now qualify as exempt employers if they themselves have 19 or fewer employees. FANZ Chairman Ian Robertson welcomed the news, saying, ‘This piece of legislation had the ability to impact significantly on the future of franchising. We are pleased at the outcome, which puts franchisees on a level playing field with independent small businesses – that was our objective.

‘With the support of our members, the Board has devoted a significant amount of time to lobbying government, making submissions and attending a number of meetings and hearings with both politicians and officials to communicate the position of our members.’

Devil in the detail

But Grant McLauchlan, managing director of Crest Clean, which is the largest New Zealand-owned commercial cleaning company, still has concerns.

‘While the Bill has yet to be passed, if the recommendations are adopted then the customer will be happy that they won’t be stuck with the staff that they wanted a change from,’ he said. ‘It’s also great that the report recognises the sanctity of the franchisor/franchisee relationship and the independence of the franchisee. That has to be positive for New Zealand’s flourishing franchise industry,’ said Mr McLauchlan.

‘However, we are concerned that the devil is in the detail of what is becoming an even more complicated piece of employment law, and small businesses will certainly need to seek legal advice on their obligations.’

Who gets the work?

The potential confusion arises over the fact that the 19-or-fewer exemption applies where the franchisee bids for and manages contracts independently, but not if the franchisor bids for contracts then allocates the work to a franchisee – which has often been the case in many commercial cleaning franchises up until now.

‘The recommendation is better than the original suggestion, where it didn’t make any difference who generated the work, but it’s still very ambiguous,’ Grant McLauchlan told Franchise New Zealand. ‘At Crest, for example, we have regional managers around the country who are themselves franchisees, and they help generate business for cleaning franchisees. There’s more work to be done on clarifying how the recommendations will actually apply – if they are adopted.’

Protecting larger companies or promoting customer choice?

Meanwhile, Patrick Lee-Lo, president of Building Services Contractors New Zealand (BSC), has suggested that the recommendations might make cleaning industry workers more vulnerable. Mr Lee-Lo, who has been highly critical of the franchise sector in the past, said, ‘Under the proposed legislation, smaller companies taking over a contract will be able to circumvent the law, avoiding costs and responsibilities that other employers face. They will not be obliged to take on the existing workers and the outgoing companies are unlikely to have positions for them elsewhere.’

Mr Lee-Lo said that, in a contracting environment, the amendment would create an uneven playing field between competing companies, discriminating against companies with 19-plus staff.

‘We had advocated strongly throughout the submission process for one law for all and had highlighted the potential impact on workers and the industry,’ said Mr Lee-Lo.

But Mr McLauchlan suggests that, as Part 6A currently operates, it is actually anti-competitive. ‘Many customers realise that even if they change cleaning companies there will be no change of personnel, so why bother going to market? This recommendation, if adopted, will at least change that and give customers more choice and better service.’

The recommendation in detail

The full text of the relevant section of the recommendation from the Transport and Industrial Relations Committee is as follows:

Exempt employers

‘We considered the position of businesses that operate as franchises. In the bill as introduced, they would fall within the definition of associated person, so all of the franchisor’s employees would be counted when calculating the number of employees. A franchisee might therefore not qualify as an “exempt employer”, even if individually they had 19 or fewer employees. We consider this appropriate where the franchisor bids for and allocates work to the franchisee; however, we believe that franchisees who have relatively few staff and bid for and manage contracts independently are acting in effect as small businesses, and so should qualify as exempt employers if they have 19 or fewer employees and are not otherwise excluded by the associated person test of new section 69DA.

We recommend amending the definition of “associated person” accordingly, by amending clause 29 and inserting clause 30A, new section 69DA. New subsection 69DA(2) would give exempt status to franchisees with 19 or fewer employees who operated at arm’s length from the franchisor; the rest of the section as amended would carry over provisions from clause 29 in the bill as introduced.’

For the full text of the Committee's report click here. The above section appears on page 7 of the 90-page report.

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