By Mike Toten Freelance Writer

A landmark Federal Court ruling has upheld the provisions that a franchisor can be held liable for errors and breaches by its franchisees. The fine of $1.44 million is the third-highest ever imposed by proceedings involving the Fair Work Ombudsman (FWO).

Section 558B of the Fair Work Act 2009 states that franchisors can be held liable if they knew or could reasonably have known of breaches by their franchisees.

FACTS OF CASE

The franchisor, a coffee chain, ought reasonably to have known of breaches because it received warnings from the FWO alerting it to potential breaches, but it then failed to take reasonable steps to avert them.

The breaches related to franchisees underpaying employees and failing to provide pay slips and keep the required employment records.

The company had previously been fined in 2022 for breaches as an employer. After that, it changed to a franchising business model. Before the 2022 fine, it had been subject to an enforceable undertaking relating to underpayments of wages over a five-year period. So the company had “history” as an offender, and the series of penalties meant that it should have been well aware of its obligations towards employees.

In this latest case involving franchisees, underpayments by eight of them amounted to $32,321, which the franchisees subsequently paid. In the 2022 case, the total underpayments had amounted to almost $430,000.

The franchisor had known about the breaches for about nine months. The company said it was in the process of closing down its business in Australia, either waiting for franchise agreements to expire, or terminating them, but was remaining registered instead of actively winding up its operations. Therefore, it knew it was exposing itself to penalties for the breaches. The latter position was to its credit, said the Court, and influenced it to reduce the penalty amount by 15%.

However, the company had a pattern of breaches, as outlined above, and yet failed to prevent its franchisees from replicating similar (mis)conduct. Instead of finding ways to ensure compliance by franchisees, it simply “gave up”.

The franchisor had a high degree of legal and practical control over the franchisees.

The Court noted it was clear that the Fair Work Act intended to ensure compliance by making franchisors as well as franchisees liable for compliance.

DECISION

The Court imposed a fine of $1.44 million on the franchisor, the third highest ever imposed by FWO proceedings.

WHAT THIS MEANS FOR EMPLOYERS

If your business is a franchisor, it may be held liable and fined for breaches of the Fair Work Act by franchisees, should it be found that you knew or could reasonably have known about the breaches and did not take reasonable steps to prevent or correct them.

READ THE JUDGMENT

Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576 (4 June 2024)