How vigilant must a franchisor be to protect the wage entitlements of its franchisees’ employees?

In an important development for franchisors, the Fair Work Ombudsman (FWO) has commenced legal action in the Federal Court against Bakers Delight Holdings Pty Ltd (the franchisor of the Bakers Delight chain in Australia) (Franchisor), Make Dough Enterprises Pty Ltd (a former Bakers Delight franchisee) (Franchisee) and the Franchisee’s directors, John Vince Puglisi and Lisa Kay Puglisi (Directors), alleging that 142 of the Franchisee’s staff were underpaid employee entitlements in three franchised bakeries in Hobart.

The case has been scheduled for mediation by the end of October 2023, with a case management conference listed for 3 November 2023.

This is the second proceeding that the FWO has filed in relation to the franchisor liability provisions in the Fair Work Act 2009 (Fair Work Act), alleging that a franchisor is legally liable for unlawful conduct of a franchisee in respect of the underpayment of employee wages. The first matter, against 85 Degrees Coffee Australia Pty Ltd, was filed in early 2023 and remains before the Court.

The allegations

In the case against Bakers Delight, the FWO has alleged that:

1. Between July 2017 and October 2020, 142 staff working at the three Hobart Bakers Delight stores were underpaid entitlements of $1.25 million, including minimum wages, weekend and public holiday penalty rates, overtimes rates, leave entitlements and minimum shift pay, and had money unlawfully deducted from their termination pay;
2. The primary cause of the underpayments was a failure by the Franchisee and the Directors to pay overtime rates as provided for in a 2012 Enterprise Agreement, and a failure to increase minimum pay rates annually to at least reflect the equivalent minimum rates as prescribed in the General Retail Industry Award, as required by the Fair Work Act;
3. The Franchisor is liable for a portion of the total underpayment, being $642,162, because it failed to take preventative measures after February 2019 when it identified pursuant to an internal audit that the Franchisee had been underpaying employees, and therefore, it either knew or ought to reasonably have known that further underpayments would occur; and
4. Whilst the Franchisor had undertaken the audit and, on discovering the non-compliance had asked the Franchisee to comply with certain measures to address the non-compliance, when the Directors refused to do so, the Franchisor took no further action.

Critically, the FWO is alleging against the Franchisee that certain conduct after February 2019 relating to the minimum wage, penalty rate and overtime contraventions was committed knowingly and accordingly constitutes ‘serious contraventions’, with the Franchisee facing penalties of up to $66,660 per contravention or $660,000 per serious contravention, the individual Directors facing penalties of up to $13,320 per contravention or $133,200 per serious contravention, and the Franchisor facing penalties of up to $66,660 per contravention.

The FWO also alleges other conduct on the part of the Franchisee, including that it provided false records to the regulator, and failed to comply with Notices to Produce documents.

How can a franchisor be liable for the underpayment of employees by its franchisees?

Under the Fair Work Act, a ‘responsible franchisor entity’ can be legally responsible if a franchisee breaches certain provisions of the Fair Work Act.

For a franchisor to be a ‘responsible franchisor entity’, it must be a franchisor in relation to the franchise, and it must have a significant degree of influence or control over the franchisee entity’s affairs.

A responsible franchisor will be in contravention of the Fair Work Act for breach of the Fair Work Act by their franchisee if the franchisor knew or could have reasonably been expected to have known that the contravention by the franchisee would occur, unless they took reasonable steps to prevent a contravention by the franchisee.

In determining whether reasonable steps were taken, the court may have regard to all relevant matters, including:

1. The size and resources of the franchisor;
2. The extent to which the franchisor had the ability to influence or control the franchisee’s conduct;
3. Any action taken towards ensuring the franchisee had a reasonable knowledge and understanding of their obligations, including the provision of training regarding workplace laws;
4. The arrangements (if any) for assessing the franchisee’s compliance with workplace laws;
5. The arrangements (if any) for receiving and addressing possible complaints about alleged contraventions of the Fair Work Act; and
6. The extent to which the arrangements with the franchisee encouraged or compelled compliance.

What constitutes taking reasonable steps to prevent a contravention will be the focus of these cases, and the outcome is likely to provide useful guidance for all ‘responsible franchisor entities’ (irrespective of size), as to what steps they need to implement to prevent contraventions of the Fair Work Act by their franchisees, and minimise their exposure to liability for any unlawful conduct.

In particular, we anticipate that the Court will give close consideration to the response by a franchisor to the findings of any internal audit, including how expeditiously a franchisor acts to address any non-compliance within the system, once detected. If a franchisor has been on notice over a period of time regarding non-compliance, we anticipate that the Court will be more likely to find that the franchisor failed to take reasonable steps to prevent the conduct.

HWLE will provide a further update on these important cases as they proceed.

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.

This article was written by Karli Evans, Partner, and Allison McLeod, Partner.