Can a franchisor be liable for wage underpayment? Worker exploitation and the Code

• The rules came from the Protecting Vulnerable Workers reforms, in force from 15 September 2017, with a six-week lead-in before s558B applied to franchisee breaches.
• Covered breaches include the National Employment Standards, awards, enterprise agreements, how and when wages are paid, records and pay slips, and sham contracting.
• On 5 June 2024 the Fair Work Ombudsman (FWO) announced $1.44 million in penalties against the 85 Degrees franchisor, the first time it had used these provisions in court.
• The Franchising Code requires disclosure of current proceedings under s558B, and written notice within 14 days of new ones not already disclosed (Schedule 1, item 4, and s34).
• Under the current Code, a court finding that a franchisee committed a serious Fair Work contravention is a ground for termination on 7 days' notice that can't be disputed through the Code (s57).

1. There must be a franchise, and the franchisee's business must be substantially or materially associated with intellectual property relating to it, such as the brand's trade mark (s558A(1)).
2. The franchisor must have a significant degree of influence or control over the franchisee's affairs (s558A(2)). The FWO says this looks at rights to direct matters such as trading hours, sales targets, staffing levels and spending, and at how the relationship works in practice.
3. The franchisee, as an employer, must contravene one of the listed civil remedy provisions in its capacity as a franchisee (s558B(1) and (7)).
4. The franchisor, or one of its officers, must have known or could reasonably be expected to have known that the contravention would occur, or, at the time, that a contravention of the same or a similar character was likely.
5. The franchisor has a defence if, at the time, it had taken reasonable steps to prevent a contravention of the same or a similar character (s558B(3)).
6. The franchisee doesn't have to be taken to court first (s558B(6)). In the 85 Degrees case, the franchisees had back-paid their staff and weren't sued.
7. If a court orders the franchisor to pay employees, it can sue the franchisee to recover that amount, with interest, within 6 years (s558C). The FWO says it can't recover penalties this way.

Section 558B(7) lists the civil remedy provisions. The FWO describes the underpayments covered as including wages and commission, leave, superannuation and reimbursement of expenses.

• The National Employment Standards (s44).
• Modern awards (s45) and enterprise agreements (s50).
• Workplace determinations, national minimum wage orders and equal remuneration orders (s280, s293 and s305).
• How and how often wages are paid (s323), and unreasonable requirements for employees or job applicants to spend or pay money (s325).
• Guarantees of annual earnings (s328).
• Sham contracting: disguising employment as independent contracting, and related conduct (s357 to s359).
• Employee records and pay slips (s535 and s536).

• On 5 June 2024 the FWO announced that the Federal Court had imposed $1.44 million in penalties on 85 Degrees Coffee Australia Pty Ltd, the franchisor of the 85 Degrees brand in Australia.
• It was the first time the FWO had used the responsible franchisor entity provisions in court.
• The case involved workers at eight franchisee-operated outlets in Sydney in 2019. Nine were underpaid a total of $32,321, including minimum rates, overtime, penalty rates, casual loadings, an allowance and annual leave.
• The franchisor didn't underpay the workers directly. It was liable because it should reasonably have known, and from 1 April 2019 did know, that its franchisees would commit those or similar contraventions, and it didn't take reasonable steps to prevent them.
• The franchisees back-paid the workers in full after an FWO audit, and the FWO didn't take court action against them.
• In separate matters, the franchisor had entered an enforceable undertaking with the FWO in 2015 and been penalised $475,200 in 2022.
• The court found a systematic failure to ensure compliance across the network, and stressed the need to deter other franchisors.

• Disclosure of current proceedings against the franchisor, its directors or associates under s558B, Part 3 of the Independent Contractors Act 2006, or a state or territory workplace or contractor law, other than unfair dismissal claims (Schedule 1, item 4(1)(b)).
• Disclosure of final civil judgments on those matters in the last 5 years (item 4(2)(b)).
• Written notice, within a reasonable time and no more than 14 days after the franchisor becomes aware, of new proceedings, judgments or arbitration awards alleging a contravention of s558B(1) or (2), if they aren't already in the disclosure document. This duty is in the Code's higher penalty tier (s34).
• Register profiles must say whether the franchisor, its associates or their directors have had a final civil judgment in the last 5 years on listed matters, which include certain workplace contraventions.
• Termination on 7 days' written notice, with no dispute through the Code, if the agreement allows it and a court finds the franchisee committed a serious Fair Work contravention, meaning a knowing or reckless one (s57(1)(d); Fair Work Act s557A).
• The same applies to court findings or convictions under the Migration Act provisions on coercing non-citizens to work, ss 245AAA to 245AAC (s57(1)(e) and (g)). These grounds apply only to agreements under the current Code.

• Does the business model include the full cost of employing enough staff lawfully? The FWO tells franchisors to make sure it does.
• What are you doing to encourage, support or train franchisees on workplace laws? The ACCC's information statement suggests asking exactly this.
• Do you audit franchisees' pay records, and what happens when problems are found?
• Can employees raise pay complaints with you directly if the franchisee doesn't resolve them?
• Has the network had FWO audits, compliance notices or court cases? Check item 4 of the disclosure document as well.
• Does the earnings information assume a wage bill, and how was it worked out?
• Which award covers the business, and does the operations manual reflect it?

• Know which award or agreement covers your staff, and update pay when rates change.
• Keep complete time and wage records and issue compliant pay slips. Both are covered by s558B.
• Use the FWO's free tools, such as its pay calculator and its record-keeping app.
• Expect your franchisor to monitor you. The FWO suggests franchisors audit pay records, ask for self-audits and require notice when the FWO contacts a franchisee.
• Fix any underpayment quickly and back-pay in full. A franchisor that pays your staff under a court order can recover the money from you (s558C).
• Remember the ACCC's information statement: it is up to you to know which employment laws apply and to comply with them.
• People knowingly involved in a contravention, such as managers or directors, can also be liable under the Act's accessorial liability rules (FWO).

• Read item 4 of the disclosure document for workplace-law proceedings and judgments.
• Check the Register profile's answers on civil judgments.
• Test the labour costs in any earnings information against award rates for a realistic roster.
• Understand the franchisor's compliance support and audit program.
• Set up payroll and record-keeping before the first shift.
• Put a complaints channel for employees in place.