In hot water: Company faces $1.4-million penalty for breaches
The Federal Court of Australia recently dealt with a case involving a franchisor's responsibility for its franchisees' breaches of the Fair Work Act 2009 (Cth).
The court's decision discusses the extent of liability that franchisors may face when their franchisees fail to comply with employment laws and highlights the importance of implementing effective compliance measures within franchise networks.
In this case, the franchisor 85 Degrees Coffee Australia Pty Ltd found itself in hot water after eight of its franchisees were found to have underpaid employees and failed to keep proper records.
The Fair Work Ombudsman (FWO) brought the case to court, arguing that the franchisor should be held liable for the contraventions under section 558B of the Fair Work Act.
Background of the case
According to records, the contraventions occurred over the course of the 2019 calendar year and involved the franchisees underpaying employees' entitlements under the General Retail Industry Award 2010 and the Fair Work Act.
The affected employees were not paid correctly for minimum wages, casual employment loading, penalty rates, overtime, breaks between shifts allowance, laundry allowance, and annual leave on termination. The underpayments totalled $32,321.19, which the franchisees had rectified by the time the case reached the court.
The FWO relied on section 558B(1) of the Fair Work Act, which imposes liability on a responsible franchisor entity for contraventions by its franchisees, provided that the franchisor knew or could reasonably be expected to have known that the contraventions would occur or that contraventions of the same or a similar character were likely to occur.
Notably, this was not the first time the franchisor had been involved in such contraventions. In 2015, the franchisor entered into an enforceable undertaking with the FWO after admitting to contraventions between 2009 and 2014.
Despite this, the franchisor continued to contravene workplace laws in its capacity as an employer between 2016 and 2017, resulting in penalties imposed by the Federal Court in a previous case.
The franchise arrangement
The court heard evidence of the franchisor's tight control over the franchisees' operations through detailed manuals, training, and regular monitoring.
The franchisor required the franchisees to operate in accordance with its "system," which included specifying minimum performance standards, product pricing, equipment, and point-of-sale systems. The franchisor also had the right to inspect and audit the franchisees' records and conduct "mystery shopper" checks.
Despite this level of control, the franchisor failed to provide adequate information or training to the franchisees regarding their obligations under the Fair Work Act and modern awards.
The court noted that many of the franchisees were owned and operated by individuals with limited English skills and no prior experience in running a retail business in Australia.
Arguments presented in court
The FWO argued that the franchisor had a history of non-compliance and failed to take reasonable steps to prevent the contraventions by its franchisees, despite being aware of the ongoing issues.
The franchisor admitted to the contraventions and accepted that it could reasonably be expected to have known about the breaches. However, it argued for a lower penalty, citing its cooperation with the FWO and the fact that it had ceased its business operations in Australia.
The court also considered the vulnerability of the affected workers, many of whom were young and on temporary visas, making them more susceptible to exploitation.
The FWO presented evidence showing that food and beverage services is the top employing industry for workers on temporary visas, and that young workers and visa holders were overrepresented in disputes within the food retail industry.
The court’s decision
In determining the appropriate penalty, the court emphasised the need for deterrence, particularly general deterrence, given the prevalence of non-compliance within the food retail industry.
The court noted that the franchisor's conduct was not a "one-off" occurrence, but rather part of a pattern of contraventions that continued even after the franchisor had entered into an enforceable undertaking with the FWO.
The court also considered the franchisor's cooperation and admissions in the proceedings, which warranted a 15% discount on the penalty.
However, the court rejected the franchisor's argument for a greater discount, finding that the FWO's approach to the penalties was "measured and proportionate to the real and substantial need for general deterrence."
Ultimately, the Federal Court ordered the franchisor to pay a total civil penalty of $1.44 million. The decision serves as a warning to franchisors about the importance of ensuring compliance with workplace laws throughout their franchise networks.
As the Federal Court made clear, failing to take reasonable steps to prevent contraventions can result in significant financial penalties and reputational damage.
The court's decision reinforces the need for employers and franchisors to be proactive in ensuring compliance with workplace laws and protecting the rights of all workers.
