Franchisors should be aware of this recent case where a Franchisor was fined a sum of $1.44 million by the Fair Work Ombudsman (FWO) for underpayments by their franchisees to their employees.
What happened?
A recent case by the Federal Court – Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA found the franchisor liable for their franchisees’ failure to pay its employees. The FWO case was that nine employees of eight 85 Degrees franchisees in Sydney in 2019 were underpaid a total of $32,231.00. The FWO acknowledged that even though the franchisor did not directly underpay the employees, they should have reasonably known and from 1 April 2019, did know pursuant to the “responsible franchisor entity” provisions that its franchisees would commit underpayment, record-keeping and pay slip infringements and did not take reasonable steps to prevent these infringements occurring.
Justice Bromwich described the franchisor’s conduct as a “systematic failure to ensure compliance within its franchise network”. The franchisor operated 85 Degrees franchises in New South Wales and the ACT.
The ‘responsible franchisor entity’ provisions
This is the first case where the FWO relied on the “responsible franchisor entity” provisions of the Protecting Vulnerable Workers reforms to successfully hold a franchisor accountable for its franchisee’s breaches. This was not the first penalty imposed on the Franchisor – they were previously fined $475,200.00 for exploiting international students in Sydney in 2022. It did not help that the franchisor had a history of non-compliance and still failed to take reasonable steps to avoid similar infringements by its franchisees. It is also interesting to note that no Court action was brought against the individual franchisees and the employees were all back paid. The franchise system no longer exists which highlights the damage that can be done to a Franchisor if they do not monitor its franchisees workplace compliance.
What are the key takeaways for franchisors?
This was all due to underpaying $32,000! Silly conduct that destroyed the system, but which took advantage of students and vulnerable employees.
Take Aways:
➢ Franchisors need to have payroll monitoring systems to audit their franchisees or set up an outsourced payroll entity that franchisees must use to ensure compliance.
➢ This case highlights the risk for franchisors, the penalties that can be imposed and the damage that can be done.
➢ This is a risk overseas franchisors should be aware of.
➢ Franchise agreements need to contain clauses that address this risk for franchisors and allow complete access of the franchisee’s payroll.
Franchisors cannot turn a blind eye to their conduct of their franchisees in compliance with payment of employee entitlements. The judge stressed the importance of deterrence due to the prevalence of non-compliance of the Fair Work Act in the hospitality and retail industry. Sanicki Lawyers can assist to ensure your compliance and that your franchise documents limit your risk and provide the necessary rights and protections for franchisors.
Contact the Franchise Group
Robert Toth – [email protected]. Mobile +61 412 67 37 57
Randima Perera – [email protected]