A recent contravention of the ‘Responsible Franchisor Entity Provisions’ by 85 Degrees highlighted the importance of risk avoidance for franchisors in administering workplace laws and regulations. In a landmark Court case, the Fair Work Ombudsman successfully relied on section 558A of the Fair Work Act 2009 (Cth) (the ‘FWA’) to penalise 85 Degrees Coffee Australia Pty Ltd, resulting in a significant $1.4 million AUD fine. The case serves a cautionary tale for franchisors, emphasising the need for diligent compliance with workplace regulations if its employees.
The franchisees’ violations predominantly stemmed from failures in recordkeeping and underpayment, underscoring the necessity for franchisors to enforce stringent adherence to employment standards. The responsibilities of franchisors have been underscored for deterrence purposes, ensuring that they are held accountable for any contraventions of workplace laws by their franchisees, including:
- National Employment Standards (NES);
- Awards and agreements;
- National minimum wage orders, equal remuneration orders and guarantees of annual earnings;
- Rules for methods and frequency of payment;
- Pay slips and record-keeping; and
- Sham contracting.
When will a Franchisor be held accountable?
Under the ‘responsible franchisor entity’ provision of the FWA, liability is extended to the franchisor where:
- there is a franchise;
- the Franchise business is materially associated with the intellectual property relating to the franchise; and
- the Franchisor has a significant degree of influence over the franchisees operational, financial or corporate affairs.
A Franchisor may be subject to legal proceedings if:
- they knew or ought to have reasonably known that the franchisee would commit the contravention; or
- at the time of the contravention, they knew or ought to have reasonably known that the contravention or a similar contravention by the franchisee was likely to occur.
Factors influencing what is deemed reasonable?
Several factors determine what constitutes reasonable steps for a franchisor:
- Control Over the franchisee: The extent to which the franchisor can exercise control over the franchisee’s operations;
- Size and Resources: The franchisor’s capacity to enforce compliance based on their size and available resources;
- Response Time: The speed with which a franchisor acts to address potential breaches; and
- Precautionary Measures: The existence of compliance procedures, compliant management systems, and other precautionary measures to ensure adherence to correct remuneration of employees and workplace laws.
What will be deemed a significant degree of influence?
A significant degree of influence is present when a franchisor has rights that allow them to contribute to, influent, control, direct, manage, regulate, determine, or command the franchisee’s financial, operational or corporate matters. In practice, this can include control over:
- Promotion and advertisement;
- Trading and store hours;
- Sales targets and quotas;
- Service standards;
- Equipment use;
- Staffing levels; and
- Expenditure on business expenses and costs.
In short, if the franchisor contributes to management and operational decisions of the franchise business, or affects the franchisee’s ability to generate revenue or profit, is considered to be a significant degree of influence.
How can I mitigate contravention of the Fair Work Act?
To avoid contraventions of the FWA, franchisors should:
- Review Workplace Laws and Update Workplace Procedures: Ensure all policies are current and compliant with relevant workplace laws.
- Establish Monitoring and Compliance Procedures: Implement formal systems to monitor franchisee compliance and breach franchisees if not in compliance.
- Provide Education and Training: Educate and train franchisees on Fair work entitlements and minimum standards.
- Implement Precautionary Measures: Develop and enforce measures to manage compliance and ensure employee remuneration complies with workplace laws, including establishing a channel for employees to report workplace issues directly to the franchisor.
In conclusion, the 85 Degree case is a powerful reminder for franchisors of the importance of ensuring franchisees are adhering to workplace laws and regulations. By taking proactive steps to ensure franchisee compliance, franchisors can mitigate risks and avoid significant penalties.
If you require any clarification or legal support, please contact IP Partnership Pty Ltd as follows:
(07) 5591 2522
reception@ippartnership.com.au
