The FWO sends a warning to all franchisors and franchisees

In July 2023, the Fair Work Ombudsman (FWO) announced it had commenced legal action against an Australian franchisor – Bakers Delight. It was alleged that the business was legally liable for extensive and significant underpayments at three Tasmanian-based stores formerly operated by one of its franchisees. So, what happened?

Here our experts explain the ins and outs of this case, why franchisors and franchisees must be on top of their compliance and share another similar case that serves as a warning for employers that they’re also on notice.

No delight in this case: the franchisor faces consequences

142 employees, including staff as young as 14 and visa holders, who worked for the franchise between July 2017 and October 2020 were underpaid to the tune of $1.25 million. It’s believed that Bakers Delight Holdings became aware the franchisee operating these three stores were underpaying staff but failed to take preventative action and therefore either knew or should’ve reasonably known that further underpayments would occur.

Fair Work Inspectors carried out a thorough investigation and discovered that staff were not only underpaid entitlements such as minimum wages, leave entitlements, and weekend, public holiday, and overtime penalty rates, but also had money unlawfully deducted from their termination pay.

On top of prosecuting the franchise, the FWO also took steps to take legal action against the couple who owned and managed the operation of the Kingston, Lindisfarne, and Eastlands stores and the company they owned, Make Dough Enterprises Pty Ltd.

Uncovering that individual underpayment ranged from $74 to one employee being underpaid $106,281, it’s a timely reminder for businesses that investing in efficient payroll software is a must.

Acting Fair Work Ombudsman Kristen Hannah said, “All business operators need to be aware that the FWO prioritises the protection of vulnerable workers, including young workers. Any workers with concerns about their pay or entitlements should contact us.”

Another warning from the Fair Work Ombudsman

Stern warnings from the regulatory body are not new; this is the second time the FWO has used franchisor liability provisions in the Fair Work Act 2009 (Cth).

In February this year, the FWO announced it had commenced legal action against 85 Degrees Coffee Australia Pty Ltd (85 Degrees) alleging that as a responsible franchisor entity, it’s legally liable for contraventions by its franchisees.

And it wasn’t just underpayments that were at the centre of this case: in 2015, the franchisor was made aware of numerous record-keeping and pay slip contraventions and underpayments through an Enforceable Undertaking between the company and the FWO. It was because of this that it’s alleged that 85 Degree’s knowledge of these compliance issues, its franchisees’ financial circumstances, and the fact that the franchisees had limited English and awareness of workplace laws made them legally liable for each offence. The 85 Degrees Coffee Australia Pty Ltd matter, currently remains before the Court.

The FWO has a long history of going after franchisees for failing to comply with modern awards, employee rights, and national employment standards, and the 85 Degrees case was the first time the regulatory body has commenced prosecution against a franchisor. And as we see the FWO continue to take legal action against businesses that do the wrong thing, it’s a reminder for all employers that if you’re doing something wrong, you will get caught and face the consequences.

In her February judgement, former Fair Work Commissioner, Sandra Parker, said, “Under federal law, where franchisors operating in Australia do not take reasonable steps to prevent contraventions by their franchise outlets, we will act.”

These two cases are a timely reminder of franchisor liability. That is, a responsible franchisor can be held legally liable for their franchisees’ conduct if:

1. they knew, or could reasonably be expected to have known, that a relevant contravention of workplace laws would happen, and
2. they have not taken reasonable steps to prevent the contravention.

If a franchisor is found legally responsible for a franchisee’s conduct, a court can make a range of orders, including that the responsible franchisor pay compensation to the franchisee’s employees.

This places significant legal liability on a responsible franchisor to take proactive and preventative measures to ensure workplace laws are adhered to.

If any of this information has raised any questions about compliance for franchisors or you have another workplace matter you need assistance with, please reach out to our workplace relations experts via our 24/7 HR Advice Line.