Underpayment of employees within the franchise sector has again made the headlines following the Federal Court’s decision in Fair Work Ombudsman v Yogurberry World Square Pty Ltd [2016] FCA 1290. This case is significant because unlike most cases brought before the courts regarding underpayment, here, the franchisee was held responsible, as well as the Franchisor, and a part owner of the Franchisor entity in their personal capacity.

What Happened?

Since the investigation into 7-Eleven franchises earlier this year, the Fair Work Ombudsman has brought a number of claims against employers who operate a franchised business for underpaying their employees. In most of these cases, only the employer is found liable. However, in this instance, the Fair Work Ombudsman commenced their proceedings against the franchisee, the franchisor, an associated entity of the franchisor and against the part owner of the franchisor entity in their personal capacity (the Respondents).

The Fair Work Ombudsman decided to join all the Respondents rather than just the franchisee based on the close association between the corporate entities and the level of control the part-owner had over the decision-making process for setting wages. In fact, the level of control the part owner wielded over the different companies meant that the part-owner was considered a “de-facto” director. Another contributing factor was the Respondent’s direct knowledge and participation in the decision-making process for setting and making payment of wages meaning that each Respondent was, at some level, culpable and contributed towards underpaying their employees.

Importantly, this was despite the fact that the franchisor, the associated entity and the part-owner had no direct relationship with the franchisee as a shareholder or director. The franchisee was a separate legal entity with its own shareholders and director.

What Did the Court Decide?

The Court held that each of the Respondents was liable for the underpayment and ordered the following:

  1. Penalties equalling $146,000 split between each of the Respondents;
  2. The Respondents paid the Fair Work Ombudsman’s costs;
  3. The Franchisor pay for an audit of every franchisee to make sure they are compliant with their employment law obligations;
  4. Each Respondent (except the Franchisee) undertake training at their own expense on their obligations under employment law.

What Can Franchisors Do?

There are a number of practical solutions that franchisors could implement to minimise the risk of non-compliance by its franchisees. At the National Franchise Convention, Natalie James of Fair Work Ombudsman applauded the practical solutions McDonald’s implemented to ensure compliance with employment law, including:

  1. Franchisee audits;
  2. Establishing an employee hotline; and
  3. State of the art time recording.

Although Ms James admitted that these practical solutions might not apply for all franchises, there are still a number of cost-effective solutions, including:

  1. Incorporating employment law training into the initial and ongoing training programs;
  2. Implementing a formal procedure and policy for dealing with employee complaints internally both at the franchisee and franchisor level; and
  3. Requiring franchisees to submit employee records as well as their usual financial information.

Each of these potential solutions will help lower the risk of franchisees contravening their legal obligations as well as promote a culture of compliance with employment law.

Finally, although the carrot is better than the stick, acting on any contraventions that arise will also show there is a strong commitment by the franchisor and the franchise network to observe compliance with their obligations to employees.

Key Takeaways

This case highlights the potential for franchisors to be held liable for contraventions of employment law that arise from the actions of their franchisees. This case primarily dealt with the issue of determining appropriate penalties to impose on the Respondents and could potentially be distinguished on the clear level of control the franchisor exercised over the franchisee. In addition, the Respondents had also admitted their involvement in the contraventions.

Nevertheless, that the Respondents included the franchisor, an associated entity and a part-owner of the franchisor entity is still significant. It highlights the current sense of expectation being placed on franchisors since the 7-Eleven investigation to exercise greater oversite over its franchisees in relation to the proper payment and treatment of the franchisee’s employees.

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Our franchise lawyers and employment lawyers have significant experience in assisting franchisors and franchisees to comply with their legal obligations in all areas of law including employment. If you are unsure about your obligations or would like assistance to minimise the risk of a contravention, get in touch with our franchise team on 1300 544 755.

Masao Watanabe

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