In 2017, the Fair Work Act 2009 (Cth) was amended to create a specific legal responsibility for franchisors and holding companies. This made them liable for their franchisees’ violations of the Fair Work Act in certain situations. Until recently, the provisions were primarily used by the Fair Work Ombudsman (FWO) for information-gathering activities. However, the FWO has recently begun taking legal action against franchisors for alleged widespread employee underpayments by their franchisees. These actions represent a significant move towards stricter enforcement and holding franchisors accountable for their franchisees’ conduct. This article will discuss the obligations of franchisors and offer practical steps they can take to minimise or avoid this liability.
Accessorial Liability
Section 550 of the Fair Work Act holds individuals or entities accountable if they are involved in a breach. Involvement includes actions such as:
- assisting, encouraging, or facilitating the breach;
- inducing the breach through threats or promises;
- being knowingly involved or participating in the breach; and
- conspiring with others to commit the breach.
Case Study: 85 Degrees Coffee Australia
The recent case involving 85 Degrees Coffee Australia highlights this issue. In February 2023, the Fair Work Ombudsman (FWO) charged 85 Degrees, a franchisor based in Taiwan, with legal responsibility for violations committed by its franchisees. The case centred on the alleged underpayment of twenty workers employed by 85 Degrees’ franchisees. These workers were reportedly underpaid in areas including:
- minimum rates of pay;
- overtime;
- penalty rates;
- casual loadings;
- laundry allowances; and
- annual leave entitlements.
While the FWO acknowledged that 85 Degrees did not directly underpay the employees, it argued that the franchisor was legally liable for these alleged violations because it should have reasonably known that its franchisees were or might have been underpaying workers. In June 2024, the franchisor was fined $1.44 million for its “systemic failure to ensure compliance within its franchise network.” The Court emphasised that franchisors cannot tolerate or ignore violations by their franchisees.
The ruling against 85 Degrees followed a 2022 penalty of $475,200. In that case, the FWO used sections 558A and 558B of the Fair Work Act for the first time to hold 85 Degrees, as the franchisor, accountable for underpayments by its franchisees. These sections were introduced after the 7-Eleven franchisee underpayment case.
The FWO continues to focus on franchisor liability, launching legal action against the franchisor of Bakers Delight in 2023. The FWO alleges that 142 staff employed across three of its franchisee locations were underpaid approximately $1.25 million in entitlements under the Fair Work Act.
Therefore, as a franchisor, it is crucial to take practical steps to avoid being held responsible or considered an accessory to breaches by franchisees.
Continue reading this article below the form1. Know Your Obligations
Understanding your obligations, as well as those of your franchisees, under the Fair Work Act and relevant awards is crucial for maintaining compliance. The Fair Work website is a valuable resource for helping you identify the correct award and set up systems to track updates or wage increases. We recommend familiarising yourself with award wages and staying alert to any relevant increases as they occur.
2. Audit Systems
Establishing a specific audit system in the operations manual helps ensure compliance. By requiring franchisees to maintain systems for ongoing compliance with employee entitlements and other issues, you can reduce your risk as a franchisor. This approach ensures that franchisors and franchisees have the necessary checks and balances.
3. Uniform Employment Contracts
Franchisors who provide franchisees with a legally compliant employment contract can help streamline the hiring process. This can also ensure that privacy and confidentiality obligations are enforced throughout the franchise network. Safeguarding privacy and confidentiality is vital for protecting a business’s valuable trade secrets.
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4. Train Your Franchisees
To help franchisors avoid accessorial liability, it is vital to ensure your franchisees know the law and their responsibilities. Regularly include employment updates in your franchise conferences or newsletters to keep these issues in mind for franchisees. Additionally, offer any extra training you believe is necessary.
5. Undertake Audits
Most franchise agreements contain the right to audit. Use this right responsibly during your regular business performance reviews and spot checks. If your franchise agreement lacks this audit power, it is essential to review and update the agreement to ensure you have the necessary rights to ensure compliance.
6. Talk to Your Franchisees
You should assist their franchisees in meeting their obligations. Some franchisees might be unaware of which awards apply or how to calculate leave entitlements and casual loading rates. You can offer ongoing support and guidance, including:
- templates;
- processes;
- training; and
- access to additional resources.
Key Takeaways
To avoid accessorial liability, franchisors must take reasonable steps to ensure franchisees comply with the Fair Work Act. These steps can vary based on the franchise network’s size, location, and industry. Larger networks may require more robust compliance systems and frequent audits, and franchises in complex industries might need additional support.
Key actions include understanding legal obligations, setting up audit systems, providing uniform contracts, and regularly training franchisees. Offering ongoing guidance, such as templates and resources, is also crucial. Tailoring your compliance strategy to your network’s specific needs not only demonstrates reasonable steps but also helps protect against liability.
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Frequently Asked Questions
Accessorial liability means that franchisors can be held legally responsible for their franchisees’ violations of the Fair Work Act, even if they are not directly involved in the breaches.
Tailoring compliance strategies to the specific needs of the franchise network helps ensure that franchisors have taken reasonable steps to prevent breaches, reducing the risk of legal liability.
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