HEALTH AND SAFETY OBLIGATIONS FROM THE PERSPECTIVE OF A FRANCHISOR

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1 HEALTH AND SAFETY OBLIGATIONS FROM THE PERSPECTIVE OF A FRANCHISOR A good franchisor will spend a lot of time making sure that the level of services provided by franchisees is up to standard. However accidents and loss can still be caused by franchisees when running their franchise business, and this does have the potential to bring liability in the direction of the franchisor. In the case of personal injury or death, a person or their estate cannot sue for fault in New Zealand due to the Accident Compensation regime, but liability can still arise under the Health and Safety in Employment Act. This Act puts obligations on employers and other people in workplace situations to maintain levels of health and safety. Most franchise agreements will require a franchisee to obey all applicable laws (including health and safety laws) but is this enough? This article explores the ways that an unwary franchisor could find themselves liable to a franchisee s breaches of the Act, what the consequences could be, and how to reduce this risk. This article focuses on potential liability of a franchisor arising from the actions of their franchisee and does not address the risk of vicarious liability as an agent for a franchisee s actions resulting in property damage which has much wider considerations. The Health and Safety in Employment Act As a franchisor, liability under the Health & Safety in Employment Act could arise from two sections. The first is Section 16 which sets out the duties of persons who control places of work. Where a person controls the place of work, they must take all practicable steps to ensure that no hazard arising in the place harms people. A person who controls the place of work is defined in the Act as including the owner of the place, or the owner of any plant in the place. (A mobile van can be a place of work.) Where a franchisor owns the site and leases that site to the franchisee as part of the franchise arrangement they could be found to be in control of the place of work. As such they may be directly liable to ensure that all practicable steps are taken to manage hazards. In a similar way, where the franchisor owns the particular plant or equipment which the franchisee uses (such as coffee carts, mobile machinery, or fixed machinery) this could conceivably open the door for the franchisor to be found to have a duty of care under Section 16 in respect of that plant. Examples of plant have included a mobile scaffold 1 and a garbage compactor 2, but not scuba diving equipment 3. 1 Department of Labour v Hawkins Construction Limited DC Otahuhu, 1 March Department of Labour v Waste Management New Zealand Ltd DC Christchurch CRN , 18 April Department of Labour v Nelson Dive Centre Limited [2001] DCR 1079

2 2 The second section of the Act which could be applicable to franchisors is Section 18, the Duties of Principals. This section requires that every principal take all practicable steps to ensure that no employee of a contractor or sub-contractor is harmed while doing any work that the contractor was engaged to do. The franchisor would have to be viewed as the principal, the franchisee would be the contractor, and the duty would be owed by the franchisor to the franchisee s employees. In that case, where any of the franchisee s employees were harmed in the course of their work for the franchisee there is a risk that the franchisor could be found liable as the principal. For this section to apply, there must be a contractual arrangement between the franchisor principal and the franchisee contractor, and the contractor must be working for the principal. Applying this to the franchise context, the franchise agreement would be the necessary contract. While franchisees are in business on their own account, franchise agreements usually (and quite properly) include a number of obligations on the franchisee to further the interests of the franchisor. One leading case dealing with the definition of a principal states that: the purposes of the Act will only be advanced if those defined as principal have some measure of control over what the person engaged actually does. Such a position would be occupied by a person who is entitled in terms of the contract to give directions to that other person. 4 Following this approach, a franchisor who has a hands-on relationship with a franchisee, or retained a degree of control of the operation of the franchise, may be viewed as a principal in terms of Section 18 of the Act. This measure of control could be established where the franchisor has maintained the right to direct the franchisee or make decisions on behalf of the franchisee. Previous cases have dealt with subcontracting situations, such as where a principal hires a subcontractor to do certain specific tasks which are part of a larger project managed by the principal. 5 The Court has not addressed the situation of a franchisor, but has noted that where a principal has some control, it cannot entirely avoid liability merely by contracting a competent contractor and being fairly removed from the day to day working at the site. Actual control might be a clause requiring the franchisee to consult with the franchisor before making certain decisions; implied control might be found in a franchisor s authority to set policy which the franchisee is required to follow. Where the Court will fall on this issue when a franchise case is eventually prosecuted is not clear. Penalties The Act provides for some rather large penalties. Where a person bears little culpability for a particular harm the fine will usually start around $50,000. Offences at the higher 4 Department of Labour v Hui [1996] DCR 918, approved in Department of Labour v P F Olsen Limited [2002] DCR Department Of Labour v Central Cranes Ltd [1996] 2 ERNZ 198

3 3 end of the culpability scale may attract a fine of between $100,000 up to the maximum $250,000. The Court is entitled to make part of the penalty a reparation ; that is, compensation paid to the victim or their family rather than a penalty to the government. In one leading case an employer was aware that an employee was bringing his 13 year old son to work (against policy), around trucks. The employer was also aware that the trucks were not properly equipped and set up to allow safe use. The child was accidently killed due to insufficient safety standards. The Court started from $175,000 when assessing the fine, from which $60,000 was deducted due to an agreed reparation payment. On appeal the High Court determined that it was wrong to make a dollar for dollar reduction in a fine because of reparation payments. The reason for that decision was that a liable person can insure for the risk of reparation, while insurance for a fine is prohibited by the Act. Payment of reparations is something which the Court will consider when setting a fine, but the Court will not allow a wrong doer to escape the consequences of their actions by using insurance to avoid actually having to make a payment. The Court observed that there are good policy reasons for ensuring that where employers infringe, penalties must bite, and not be at a licence fee level. 6 After the reduction for reparations (which the employer was not directly paying) the level of the fine was inadequate, so the High Court increased it. The Court does not wish to discourage insurance for the benefit of an injured person or their family so reparations will be relevant to setting the level of a fine, 7 but will be in the nature of a 10-15% reduction rather than a dollar for dollar reduction. What can a franchisor do? Each franchisor and each particular trade in which they are involved, will have its own particular risks associated with potential harm to workers and others. The degree of control that a franchisor may have over its franchisees and the workplace will also vary between franchise systems. There will always be a balance as to how much control a franchisor wishes to have over a franchisee. With greater evident control comes an increased risk that a franchisor may be found to be a principal. To combat this a franchisor may deliberately avoid taking on any role in managing a franchisee s health and safety policies. The risk there is that if a health and safety issue does arise and the franchisor is found to be liable as a principal, the penalty would be far more significant than if the franchisor had made good faith attempts to address the franchisee s health and safety obligations. One thing that is clear is that if a franchisor does involve itself in a franchisee s health and safety obligations, it 6 Department of Labour v Street Smart Limited (8 August 2008, High Court, Hamilton CRI , Justice Duffy), at paragraph 59 7 Department of Labour v Preco Limited (26 September 2007, District Court, Tauranga CRI )

4 4 runs the risk of being liable, and therefore must ensure that it discharges its duties under the Act. The following are a few practical suggestions for consideration by franchisors, but are not a substitute for careful legal advice on a case by case basis which should be sought: 1. The best risk management step appears to be vigilance in actively considering how to complete tasks as safely as possible and in ensuring those steps are taken by the workforce. Having recognised that need for vigilance, the need for that vigilance and awareness of the duties involved should be clearly communicated to the franchisees in respect of their business. 2. The franchisor s manual for operating the franchise system in the franchisees work needs to be comprehensive, correct and up to date. The responsibilities, duties, danger, risks and the policies and procedures for identifying risks and managing those risks needs to be comprehensively set out in the manual to ensure a safe working environment. 3. The franchisor should regularly review the health and safety provisions of its manual and update and communicate the updates to franchisees promptly. 4. Where particular equipment or vehicles are supplied, or specified the franchisor should ensure that the proper procedures relating to safely using that equipment or vehicle are spelt out in the manual. 5. The need for a health and safety hazard management system needs to be specified for franchisees and preferably guidance given as to how that should be obtained and implemented. A franchisor could even co-ordinate and source the necessary expertise to establish a management system. 6. Subject to the cautionary comments regarding the degree of control by a franchisor, training and monitoring the supervision of franchisees and their staff particularly in areas relating to health and safety should ideally be arranged by the franchisor rather than simply left to a franchisee to arrange. This training should be thorough, correct and complete. 7. Procedures should be in place for the up-skilling of replacement staff of a franchisee. 8. Audit checks could be undertaken by the franchisor from time to time to ensure that health and safety specified policies and procedures are being complied with. This could extend to ensuring franchisees are accessing and implementing the latest manual requirements.

5 5 9. There should be an appropriate reporting system established by franchisees to ensure franchisors are notified at the earliest opportunity of any short coming or failure or other accident relating health and safety issues. 10. OSH guidelines should be communicated by the franchisor to the franchisee but on an understanding that this is not necessarily exhaustive in terms of managing the risk exposure and discharging obligations. 11. Where franchisees are engaging outside contractors, then once again franchisees should be placed under an obligation to ensure that those contractors themselves fully understand and implement health and safety requirements when working for the franchisee. 12. Appropriate insurance cover by both franchisor and franchisee should be established to cover reparation orders. 13. Franchisors and franchisees should in summary: (a) (b) (c) (d) Evaluate hazards Establish policies and procedures Equip workers Ensure compliance By David Munn (a partner with Gaze Burt lawyers, assisted by Nathan Tetzlaff, an associate of Gaze Burt practicing in the area of Health and Safety and Employment).