Modern slavery in the world of franchising

In recent years, we have seen the emergence of the concept of “modern slavery”. However two recent legal developments mean that modern slavery is an issue that can no longer be ignored by many businesses involved in the supply of goods and services in Australia. In this article, we look at those legal developments and the immediate consequences for franchisors.

The NSW Act

New South Wales took the lead on modern slavery, with the passing of the Modern Slavery Act 2018 (NSW) (NSW Act) on 21 June 2018.

Among other things, the NSW Act puts an obligation on “commercial organisations” to prepare a modern slavery statement that complies with the NSW Act. Commercial organisations that fail to prepare such statements may be liable for fines of up to 10,000 penalty units ($1,100,000).

What is a commercial organisation?

A commercial organisation is an organisation that has employees in New South Wales and that:

• Supplies goods or services for profit or gain; and
• Has a total turnover in a financial year of at least $50 million (or as otherwise set out in the Regulations).

While, based on the above, many small franchisors will not be caught (given the monetary threshold) larger franchisors might be. Further, an organisation will be caught even if it only has employees in the State – i.e. it doesn’t have to be registered in New South Wales or necessarily have an office there, but may still be caught by this definition.

What is a modern slavery statement?

A modern slavery statement is essentially a statement, prepared in accordance with the NSW Act and Regulations, which includes information in respect of the steps taken by the commercial organisation to ensure its goods and services are not a product of a supply chain in which modern slavery is involved.

The Regulations have not yet been released, however it is anticipated that matters which may be required to be included in a modern slavery statement will include:

• The organisation’s structure, its business and its supply chains;
• The organisation’s due diligence process in relation to modern slavery in its business and supply chains;
• The parts of the organisation’s business and supply chains where there is a risk of modern slavery taking place, and the steps it has taken to assess and manage that risk; and
• Training about modern slavery made available to employees of the organisation.¹
• Once a modern slavery statement is prepared, it will need to be made public in accordance with requirements to be set out in the Regulations. The penalty for failing to comply with this requirement is severe – 10,000 penalty units or $1,100,000.

What is modern slavery under the NSW Act?

In 2016, it was estimated that there were up to 45.8 million victims of modern slavery globally.² So what is ‘modern slavery’?

The NSW Act includes a relatively broad definition of modern slavery, being:

• Any conduct constituting one of a listed offences (e.g. trafficking of persons (including children) under the Commonwealth Criminal Code);
• Slavery and slavery like offences under the Crimes Act 1900; or
• Any conduct involving the use of any form of slavery, servitude or forced labour to exploit children or other persons taking place in the supply chains of government agencies or non-government agencies.

Introduction of a Federal Bill

The federal government is also taking action on modern slavery, with the Modern Slavery Bill 2018 (Cth) (Modern Slavery Bill) being introduced into federal parliament on 28 June 2018.

Modern Slavery under the Modern Slavery Bill

The Modern Slavery Bill defines ‘modern slavery’ by reference to:

• Divisions 270 and 271 of the Criminal Code Act 1995 (Cth);
• Trafficking in persons; and
• The ‘worst forms of child labour’.

Broadly, as currently drafted, ‘modern slavery’ will include slavery, servitude, forced labour, deceptive recruiting for labour or services, forced marriage, debt bondage, trafficking in persons and the worst forms of child labour.

Application of the Modern Slavery Bill

Australian entities and entities carrying on business in Australia with annual consolidated revenue of at least $100 million (Financial Threshold) will be required to comply with the obligations set out in the Modern Slavery Bill (assuming, of course, that the corresponding Act is passed in the same form as the bill).

Under the bill, an entity ‘carries on business in Australia’ if the entity carries on business in Australia within the meaning of section 21 of the Corporations Act 2001 (Cth) or would be taken to do so if the entity were a body corporate. Non-corporate Commonwealth entities and Commonwealth corporate entities and companies which meet the Financial Threshold will also be required to comply. Other entities may also voluntarily comply with the requirements, even if they don’t meet the Financial Threshold.

Requirements of the Modern Slavery Bill

Under the Modern Slavery Bill, relevant entities, including entities which choose to voluntarily comply, (Reporting Entity), would need to submit annual ‘modern slavery statements’ to the responsible Minister within six months after the end of the Reporting Entity’s financial year.

Based on the current bill, such a statement must meet mandatory criteria, including³ describing:

• The structure, operations and supply chains of the Reporting Entity;
• The risks of modern slavery practices in the operations and supply chains of the Reporting Entity and any entities that the Reporting Entity owns or controls;
• The actions taken by the Reporting Entity and any entity that the Reporting Entity owns or controls to assess and address those risks (including due diligence and remediation processes);
• How the Reporting Entity assesses the effectiveness of such actions; and
• The process of consultation with any entities that the Reporting Entity owns or controls.

Interestingly, and in contrast to the NSW Act, the Modern Slavery Bill does not impose penalties for non-compliance or for providing false or misleading modern slavery statements.

What does this all mean for franchisors?

Franchisors are well aware of the increased scrutiny of franchising in the media. Therefore, there is a heightened reason for franchisors to be aware of the shift towards legislation dealing with modern slavery (and, in particular, its impact on supply chains) and, if applicable, to take steps to ensure that they comply with applicable laws.

At the moment, New South Wales is the only jurisdiction that has formally introduced such laws. Therefore any franchisor that has employees in New South Wales should confirm whether they fall within the scope of the NSW Act and, if so, consider the steps that they will need to take to comply with the NSW Act. In this regard, it may be that franchisors need to consider steps beyond simply preparing a modern slavery statement. For instance, this might be a good opportunity to:

• Review supply chains (in the context of modern slavery) and seek to take steps to address any issues that may be identified;
• Introduce staff training to teach staff how to identify areas of concern;
• Develop risk management tools to identify and manage risks associated with modern slavery; and
• Review contracts used in supply chains to ensure that franchisors are also requiring their suppliers to meet the requirements of the modern slavery legislation.

Franchisors should also be mindful that while New South Wales has been the first jurisdiction to introduce such laws, it almost certainly will not be the last. As such, this is an area of law that franchisors should continue to monitor, both at an operational level and also at a board level.

This article was written by Allison McLeod, Partner, Laura Young, Partner and Anja Evans, Associate.

¹ Refer to clause 24(5) of the NSW Act
² Australian Government, Modern Slavery in Supply Chains Reporting Requirement.  Public Consultation Paper and Regulation Impact Statement (August 2017).
³ Subsection 16(1) of the Modern Slavery Bill 2018 (Cth)