News & Insights

The Fair Work Ombudsman (FWO) has issued its first court proceeding against a franchisor, claiming that the franchisor is legally responsible for its franchisee’s underpayment of its workers.

This case is a prime example of how a franchisor can be held liable for its franchisee’s conduct in relation to the franchisee’s own workers.

The FWO’s powers were introduced in 2017 to hold franchisors and companies responsible for underpayments in their networks but 85 Degrees is the first case where the FWO has actually used these powers.

Underpayments within franchises – who’s responsible?

It has been alleged that eight franchisee-operated cafes of 85 Degrees Coffee Australia Pty Ltd (85 Degrees) had made underpayments, totalling $32,321, and made fake wage records in 2019. The alleged conduct was discovered through audits conducted by the FWO.

Significantly, the FWO is claiming that 85 Degrees is liable as a “responsible franchisor entity” for the alleged underpayments. This comes after 85 Degrees was hit with a $475,200 penalty in Federal Court proceedings for exploiting young Taiwanese students in Sydney under an internship arrangement in 2016 and 2017.

What was the scale of the underpayments?

The individual underpayments in the current proceeding range from $239 to $15,198. The FWO contends that 85 Degrees should “reasonably have known” its franchisees would underpay the workers or commit similar contraventions, based on the following:

• the enforceable undertaking given in relation to the earlier prosecution and subsequent audits;
• its knowledge of its franchisees’ financial circumstances; and
• its knowledge that the franchisees had limited English and limited awareness of workplace laws.

85 Degrees faces penalties of up to $65,000 for each alleged contravention.

It is understood that the individual franchisees back-paid the workers in full.

How Franchisors can avoid liability

Franchisors can avoid this kind of liability if they have taken “reasonable steps” to prevent underpayments by their franchisees and, if issues are uncovered, deal with it.

Although the franchisor, in this case, did not directly underpay the workers, the FWO argues that the franchisor should “reasonably have known” its franchisees would underpay the workers or commit similar contraventions and did not take action to prevent such contraventions from occurring in its network.

The FWO has made clear that “where franchisors operating in Australia do not take reasonable steps to prevent contraventions by their franchise outlets, the FWO will act”.

The FWO may choose to take action against the franchisor only, and no case may arise against the franchisees’ who actually committed the contravening conduct.

Key points

• Franchisors may be liable for the conduct of their franchisees, if they should have reasonably known franchisees would commit contraventions of the Fair Work Act 2009 (Cth).
• Failure to adequately remunerate employees, or to keep adequate payslips and pay records, can result in significant financial penalties for franchisors (as well as for franchisees, and potentially, individuals involved in such contraventions).
• Clauses in Franchise Agreements will not be enough to limit a franchisor’s liability. Franchisors will need to:
  • conduct actual checks
  • give suitable training with their franchisees and employees;
  • investigate suspicions; and
  • take steps to stop underpayments that come to its attention.

How can Macpherson Kelley help?

Macpherson Kelley has a dedicated team of franchise and employment experts who can assist with reviewing franchising documents, providing advice on workplace and pay compliance and how to take reasonable steps to limit liability.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.