Franchisor fined $1.44 million in relation to failure to take reasonable steps to prevent underpayments of franchisees

27 June 2024

The first penalty for a franchisor contravening the ‘responsible franchisor entity’ provisions in the Fair Work Act 2009 (Cth) (the Act) has been handed down, nearly seven years after the package of reforms were enacted to safeguard and protect vulnerable workers.

The Court considered that a significant penalty was necessary to deter unlawful conduct in the franchise sector and stated that ‘it must not be seen as acceptable for franchisors to tolerate, or turn a blind eye to, franchisee contraventions as an ordinary part of business. The clear legislative intention is to encourage compliance by making franchisors responsible for non-compliance as well the employer franchisees‘.

On 4 June 2024, the Federal Court imposed a significant fine of $1.44 million on 85 Degrees Coffee Australia Pty Ltd (85 Degrees), a franchisor, for its role in failing to ensure compliance with the Act on the part of several franchisees. The contraventions related to underpayments in breach of relevant Awards, and failure to comply with record-keeping and payslip obligations.

85 Degrees had been on notice of significant compliance issues within its system for some time, having entered into an enforceable undertaking for breaches of relevant Awards in 2015, having been prosecuted and fined for contraventions in 2016-2017, and having received correspondence from the Fair Work Ombudsman identifying the further contravening conduct in 2019 following a workplace investigation and audit.

In considering the admissions made by the franchisor, the Court agreed that 85 Degrees had failed to take reasonable steps to address the franchisees’ conduct, and that ‘the facts demonstrate a systematic failure to ensure compliance within its franchise network’.

The Court handed down the extensive penalty after the franchisor determined not to contest liability for the alleged breaches of the Act, with 85 Degrees admitting (in the face of overwhelming evidence) that it knew the contraventions were likely to occur (particularly from the date of the receipt of the correspondence from the Fair Work Ombudsman onwards), and that it failed to take reasonable steps to prevent the contraventions.

The franchisees’ contraventions

Over the course of 2019, eight franchisees of 85 Degrees contravened the Act in relation to underpayment of employee award entitlements, and related record-keeping and pay slip deficiencies. 85 Degrees admitted that it knew from April 2019 that breaches ‘of the same or a similar character were likely to occur’, as evidenced by contemporaneous correspondence between the franchisor and the Fair Work Ombudsman.

Despite the franchisor’s knowledge of the conduct, the contraventions by the franchisees continued until the end of 2019. The franchisor’s actions to address the conduct were limited to sending two brief letters to the relevant franchisees (save for one franchisee, which was overlooked), some 6 months apart, with no other comprehensive follow up steps taken.

‘Responsible franchisor entity’ provisions

The vulnerable worker reforms to the Act introduced liability for a ‘responsible franchisor entity’, where one or more of its franchisees have contravened certain sections of the Act.

A franchisor will be a ‘responsible franchisor entity’ if it exercises a ‘significant degree of influence or control over the franchisee entity’s affairs’. 85 Degrees admitted that it did exercise significant influence or control over its franchisees due to attributes including the following:

  1. the requirement that franchisees accord with the 85 Degrees ‘system’ in their stores;
  2. the detailed operations manual created by 85 Degrees with which franchisees were required to comply;
  3. 85 Degrees providing required training to the franchisees’ store managers and other staff;
  4. the requirement for franchisees to sell products manufactured by 85 Degrees, at prices specified by 85 Degrees;
  5. the requirement for franchisees to use equipment, point of sale and security systems as directed by 85 Degrees; and
  6. the right of 85 Degrees to inspect and audit the franchisees’ records.

A responsible franchisor entity will be in breach of the Act if it ‘knew or could reasonably be expected to know’ that one of its franchisees would contravene the relevant provisions of the Act, unless the responsible franchisor took steps to prevent the contravention.

85 Degrees admitted that it did not take reasonable steps to prevent the contraventions, even in the period during which it had ‘actual knowledge’ of its franchisees’ contraventions, following the correspondence from the Fair Work Ombudsman.

While 85 Degrees had told the Fair Work Ombudsman during the investigation that it was working to develop an ‘action plan’ and training materials for franchisees, it did not communicate those to any of the franchisees until some 6 months after the correspondence was received.

Penalties a ‘general deterrent’

In the Court’s decision, Bromwich J emphasised the need for a ‘condign’ (or appropriate) punishment to act as a general deterrent against other ‘would-be contraveners, especially other franchisors’.

85 Degrees argued for a significantly lesser penalty for reasons including its cooperation in relation to admitting liability, and on the basis that its conduct constituted a single contravention under the Act. The Court noted that an appropriate penalty was especially pertinent in industries such as the food retail industry within which a vulnerable workforce, including workers on temporary visas and ‘younger workers’ with generally less work experience, are employed. Given the Court’s view that the risk of future contraventions from other franchisors in the same industry was ‘high’ and given the pattern and conduct of 85 Degrees (despite knowledge of its franchisees’ contraventions), Bromwich J imposed a ‘very substantial overall penalty’ in the sum of $1.44 million. This incorporated a 15% discount for the cooperation of 85 Degrees prior to the hearing.

Takeaways for Australian franchisors

The Court’s decision puts franchisors on notice of the significant potential exposure they may have for underpayments in the context of their operations under the new provisions of the Act.

Franchisor liability for franchisee breaches of workplace laws remains a key compliance focus, and franchisors need to ensure that they are taking ‘reasonable steps’ to prevent such breaches.

The Court stated that ‘it is important to impose such a penalty that contraventions are seen to be uncommercial, even after factoring in a lower risk of being caught‘. The Court noted that ‘sufficiently severe’ sanctions are needed to ensure that ‘compliance vice’ does not give contraveners a ‘competitive advantage’.

This case also reminds franchisors that:

  1. they should not turn a blind eye to breaches – if a franchisor is aware of breaches (or the likelihood of breaches) they need to take active steps to address these – or run the risk of being found liable themselves. Steps such as auditing potential areas of non-compliance with any applicable industrial instruments and the Act are critical; and
  2. they need to address and follow through any breaches identified – a one off letter, breach notice or training session will not be sufficient to minimise exposure to liability under the Fair Work Act. It is important for franchisors to promptly follow up (and follow through) when issues are identified.

If you require guidance on how to minimise your exposure to liability for your franchisees’ wage and pay arrangements, please reach out to the authors or any member of our Franchising & Retail and Workplace Relations teams.

To read more about the case, please click here.

This article was written by Karli Evans, Partner and Lachlan Christie, Law Graduate.

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