In Short
- Franchisors can be held legally responsible if their franchisees underpay employees, even if they are not directly involved.
- Penalties for underpayments are severe, with fines up to $469,500 for large businesses from August 2024.
- Proactive compliance is key—training, audits, and clear contracts help franchisors avoid liability.
Tips for Businesses
Make wage compliance a priority. Provide training for franchisees, conduct regular audits, and include clear employment law obligations in franchise agreements. If you spot a compliance issue, act fast to fix it. Ignoring underpayments could lead to serious legal and financial consequences for both you and your franchisees.
As a franchisor, you must ensure wage compliance for yourself and your franchisees. Your franchisees must follow employment laws, including paying wages correctly. If they underpay employees, both you and they could face severe penalties. This article explores the consequences of franchisee underpayments in Australia and examines recent rulings on your potential vicarious liability.
Ensure your employees are paid correctly with our free guide on how to prevent wage underpayment.
The Fair Work Act and Its Implications
The Fair Work Act 2009 (Cth) (Act) is the foundation of workplace relations law in Australia. It outlines your rights and obligations as an employer, including minimum wage, leave entitlements, and workplace conditions. Under this Act, your franchisees must pay employees correctly and on time. Failing to comply breaches the law and can result in significant penalties. In 2017, the Fair Work Ombudsman (FWO) gained broader powers to hold franchisors and companies accountable for underpayments in their networks. If your franchisees fail to comply, they could face serious financial and legal consequences.
Penalties for Franchisees
Franchisees found to have underpaid their employees can face multiple penalties. These typically include:
- Repayment of Unpaid Wages: Franchisees must repay any wages that have been underpaid to their employees, including interest on the outstanding amounts.
- Fines: Civil penalties for breaches of the Act can be significant. From 26 August 2024, the maximum penalty for a serious breach by an individual or small business will be $18,780 per breach for an individual and $93,900 for a company. For larger companies, the new maximum penalty has risen to $469,500.
- Compensation Orders: Courts may order franchisees to compensate employees for any losses incurred due to underpayment.
Vicarious Liability of Franchisors
Following the 2017 amendments to the Act, a ‘responsible franchisor entity’ can be held legally accountable if a franchisee breaches specific provisions of the Act. As a responsible franchisor, you may be considered in contravention of the Act if your franchisee commits a breach, mainly if you were aware of, or could reasonably have been expected to know about, your franchisee’s contravention.
Am I a Responsible Franchisor?
To be considered a responsible franchisor entity:
1. There must be a franchise arrangement in place.
This means that, as the owner of a brand or trademark, you are permitting the franchisee to profit by using your brand, trademark, or the reputation associated with your brand to operate their business.
2. The franchisee’s business must be substantially or materially associated with intellectual property relating to the franchise.
Essentially, the identity and reputation of your brand should be central to the franchisee’s operations, ensuring that customers recognise and trust the franchisee’s business as part of your wider franchise network.
3. As the franchisor, you hold considerable influence or control over the franchisee’s affairs.
This aspect examines how much you influence or control the franchisee’s financial, operational, and corporate matters.
All franchise arrangements inherently involve some degree of control or influence. However, to be regarded as a responsible franchisor, you must have significant engagement in the franchisee’s business operations.
To determine whether your influence or control is significant, you should evaluate the following:
- Your rights to direct, manage, regulate, determine, or command the franchisee on financial, operational, or corporate matters. For instance, you may set trading hours, sales targets, staffing levels, or expenditures on business expenses and costs.
- How does the relationship between you and the franchisee operate in practice, including the extent of your influence or contribution to the management or operational decisions of the franchisee’s business, and how may you impact the franchisee’s ability to generate revenue or profits?
Reasonable Steps to Avoid Vicarious Liability
To reduce the risk of being held vicariously liable, you should adopt proactive measures to ensure franchisees comply with relevant employment and workplace laws. These may include:
- Training and Education: Providing regular training to franchisees regarding their obligations under the Fair Work Act can help ensure they understand and comply with wage laws.
- Compliance Programs: Establishing robust compliance programs that include regular audits, compliance checks, and support services for franchisees can demonstrate a franchisor’s commitment to lawful practices.
- Clear Communication: Maintaining open and transparent communication channels between franchisors and franchisees can help promptly identify and address potential compliance issues.
- Contractual Provisions: Including specific provisions in franchise agreements that require compliance with employment laws and setting out the consequences for breaches can provide a clear framework for enforcement.
If you are notified of non-compliance issues as a franchisor, you should promptly work with your franchisees to address and rectify any breaches.
Franchisor Penalised $1.44 Million for Franchisee Breaches
After a $475,200 penalty in 2022 for exploiting student workers in Sydney, the FWO secured $1.44 million in penalties in June 2024 against the 85 Degrees franchisor in Australia. The franchisor failed to ensure its franchisees’ ongoing compliance. This Federal Court case marked the first time the FWO used responsible franchisor entity provisions to hold a franchisor accountable for franchisee misconduct.
Justice Bronwich ruled that although the franchisor did not directly underpay workers, it was legally liable for employee wage underpayments and bookkeeping breaches by its franchisees. The court found that the franchisor should have reasonably known. They also found that they knew from 1 April 2019 that franchisees had or would continue to violate workplace laws. Despite this, it failed to take reasonable steps to prevent further breaches. Justice Bronwich emphasised that franchisors must not tolerate or ignore franchisee contraventions as part of business operations.
Key Takeaways
Penalties for franchisee underpayments in Australia are strict, and the FWO continues to focus on franchisor accountability. Under the Fair Work Act, your franchisees must pay wages correctly. As a franchisor, you must stay vigilant. This is because failing to take reasonable steps to prevent underpayments can make you vicariously liable. Be proactive by implementing strong compliance programs and providing ongoing education and support to your franchisees. If you identify potential non-compliance, act quickly and work with your franchisee to correct any underpayments.
If you have any legal queries, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Do I need to ensure wage compliance for my franchisees?
Yes, as a franchisor, you must ensure that your franchisees comply with employment laws, including paying wages correctly. If they underpay employees, both you and the franchisee could face penalties.
What are my obligations under the Fair Work Act?
The Fair Work Act 2009 (Cth) outlines your responsibilities as an employer, including minimum wage, leave entitlements and workplace conditions. Franchisees must comply with these laws, and franchisors can be held accountable for non-compliance.
We appreciate your feedback – your submission has been successfully received.
