News & Insights

Further to our previous insight, The Federal Court of Australia has delivered a decision on point.  Fair Work Ombudsman V 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576 has highlighted the risks to franchisors if their franchisees contravene workplace laws.

Franchisors have obligations that, in effect, extend to enhancing the protection of franchisees’ employees. This case serves as a strong reminder that the franchising sector is under close scrutiny, and franchisors must take proactive steps to protect their franchisees’ employees.

Background

The Fair Work Ombudsman’s (FWO) powers were introduced in 2017 to hold franchisors (and related companies) responsible for franchisee’s wage contraventions if it knew, or could have reasonably known, that a contravention by the franchisee was likely to occur. 85 Degrees Coffee Australia Pty Ltd (85 Degrees) is the first case where the FWO has used these powers.

85 Degrees allegedly had eight franchisee operated cafes underpay staff and falsify wage records, uncovered during an FWO audit. Previously, 85 Degrees had faced penalties for underpayments and record-keeping violations before transitioning to a franchise model around 2015.

Despite switching models, the franchisees followed 85 Degrees’ systems, continuing the same non-compliant practices. Many franchisees, with limited English and little business knowledge, were unaware of Australian workplace laws. The FWO argued that 85 Degrees, as a “responsible franchisor entity,” should have reasonably known the franchisees would contravene the Fair Work Act.

85 Degrees may have been able to defend the claim by the FWO, if it could have proven that it had taken reasonable steps to prevent the contraventions by the franchisees.

Decision

The decision in this case resulted in the judge imposing penalties of $1.44million on 85 Degrees, not the franchisees.  This was the third highest penalty ever secured by the FWO, and the first in relation to the Fair Work Act’s section which extends liability for contraventions by franchisees to their “responsible franchisor”.

The decision was based on the following:

• Acknowledgment of likely contraventions: 85 Degrees did not dispute that it could have reasonably known about the potential for its franchisees to repeat similar violations. In fact, the company admitted to having actual knowledge of these contraventions during most of the period in question.
• Control over franchisees: The company was deeply familiar with its franchisees’ operations and had the capacity to implement measures to prevent these breaches but chose not to. This undermined any defense based on having taken “reasonable steps.”
• Industry context: The decision reflects broader concerns about non-compliance within the franchise sector, particularly in industries known for exploiting vulnerable workers, such as those on temporary visas.

What does this mean for franchisors?

The case serves as a critical reminder that franchisors must be proactive in ensuring compliance across their networks. Here are key takeaways:

• Liability is real: Franchisors can be held liable for their franchisees’ actions if they fail to take reasonable steps to prevent violations of the Fair Work Act.
• Proactive measures are essential: Simply informing franchisees of their obligations isn’t enough. Franchisors should implement regular training, provide meaningful guidance, establish reporting policies, and conduct audits to detect and address breaches promptly.
• Franchise agreements aren’t a shield: Clauses in agreements won’t suffice to limit liability. Active involvement in compliance is crucial.
• System viability matters: If the franchise model restricts franchisees’ ability to achieve a reasonable return on investment, it may drive non-compliance. Franchisors should ensure that their systems are viable and do not impose excessive limitations that hinder profitability.

Preparing for increased scrutiny

With $28 million in additional funding allocated to the FWO over the next four years, increased oversight of large employers, particularly in the franchise sector, is expected. Franchisors should:

• Review and update franchise agreements with clear obligations for compliance.
• Implement training and auditing processes to implement reasonable steps for prevention of franchisee contraventions with the Fair Work Act
• Ensure systems and templates are in place for franchisees to maintain proper records and meet their legal obligations.

Key points to remember

• 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 also need to:
  • give suitable training and guidance to their franchisees;
  • provide record keeping systems, procedures and templates for franchisees to use;
  • investigate suspicions; and
  • conduct actual checks
  • take steps to stop underpayments that come to its attention.

How can Macpherson Kelley help?

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