Beyond the Brand: The Cost of Underpayments in Franchise Networks

Introduction

Amongst other methods of business expansion, franchising often represents a robust strategy for growth that offers the opportunity for a business to expand its footprint relatively quickly, efficiently and with targeted financial investment. 

However, as a recent decision of the Federal Court of Australia illustrates, this business model is not without risk - particularly when it comes to the liability that a franchisor can potentially face for the acts and omissions of its franchisees.

This case is significant because, since the “responsible franchisor entity” provisions were introduced in 2017 by the then-Turnbull Government, it represents the first time that the Fair Work Ombudsman (“FWO”) has relied on the provisions to successfully prosecute a franchisor with respect to the failings of its franchisees. 

The decision

On 4 June 2024, Justice Bromwich delivered judgment in Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576. He found that the respondent franchisor, 85 Degrees Coffee Australia Pty Ltd (“85 Degrees”), was liable to pay penalties totalling $1.44 million for a “systematic failure to ensure [industrial] compliance within its franchise network” following underpayments at various franchisee outlets in New South Wales. This represents the third largest fine ever secured by the FWO. 

The Court found that over the course of 2019, franchisees of 85 Degrees engaged in underpayment of employees’ entitlements in relation to minimum wages, casual loading rates, penalty rates, overtime and breaks. In addition to this, the franchisees failed to keep employment records, pay on a regular basis and provide payslips as required. 

Why was the franchisor held liable?

85 Degrees was held to be liable because the Court found that it should have reasonably known, and from 1 April 2019 was aware, that its franchisees would commit the same or similar contraventions and it failed to take reasonable steps to prevent those contraventions from occurring.  That is, the Court found that 85 Degrees contravened its ‘responsible franchisor’ duty under section 558B of the Fair Work Act 2009 (Cth), which provides that a “responsible franchisor entity” can be held liable if they could reasonably have known of the breaches by their franchisees. 

Key takeaway

The decision serves as a timely reminder that franchisors can be held legally liable for its franchisees’ underpayment of workers if they know, or should reasonably have known, about these issues and failed to take reasonable steps to prevent them from occurring. 

It also underscores that franchising as a model for business expansion comes with its own unique set of risks that, from a compliance perspective, need to be carefully managed through the introduction of robust risk management controls that are both proactive and reactive in nature. 

Our team regularly advises businesses on the implementation of controls to avoid underpayment risk, including within a franchisee-franchisor business model. If you would like to discuss the implications that this decision may have for your business, or how we can help you to strengthen the risk management controls within your business, please don’t hesitate to contact us.