Franchisors on notice

Background facts

The decision relates to legal action commenced by the Fair Work Ombudsman (FWO) in the Federal Court. The FWO alleged that 142 mostly young workers at three Hobart “Bakers Delight” outlets were underpaid a total of $1.25 million between July 2017 and October 2020. The outlets were operated by a franchisee, Make Dough Enterprises Pty Ltd (Make Dough), which was owned by Mr and Mrs Puglisi. By the time of the hearing, Make Dough was in liquidation and did not actively participate in the proceedings. Nor did Mr and Mrs Puglisi.

The FWO alleged that the franchisor, Bakers Delight Holdings Ltd (BDH), was liable for $642,162 of the underpayments under the franchisor liability provisions in section 558B of the Fair Work Act 2009 (Cth) (FW Act). The FWO's case was that BDH became aware of the franchisee’s non-compliance through an audit it commissioned in February 2019, which identified underpayments. It was alleged that, despite knowing this, BDH failed to take reasonable steps to prevent further underpayments from occurring.

Under section 558B of the FW Act, for a franchisor to be held liable for the contraventions of the franchisee, an applicant must prove:

• An employer / franchisee has contravened a relevant civil remedy provision of the FW Act (in this case, a breach of the obligation to pay the employee their wages).
• The franchisor is a “responsible franchisor entity” for that franchisee.
• The contravention occurred in the franchisee's capacity as a franchisee.
• The franchisor (or one of its officers) knew or could reasonably be expected to have known that the contravention would occur, or that a contravention of the same or a similar character was likely to occur.

The franchisor is not liable, however, if it can prove that it took “reasonable steps to prevent a contravention... of the same or a similar character”.

A central issue in the decision was how the FWO could prove the franchisee’s contraventions to establish the first element of franchisor liability. This issues was being dealt with as a separate question in the overall prosecution. Specifically, the Court had to decide if the FWO could rely on the “reverse onus” provision in section 557C of the FW Act against the franchisee, Make Dough, in its case against the franchisor, BDH. Section 557C provides that where an employer fails to keep proper records as required, the burden of disproving an allegation of underpayment shifts from the applicant to that employer.

BDH argued that, because it was the franchisor and not the employer / franchisee, the FWO could not rely on the “reverse onus” in proving the first element of franchisor liability (ie that the employer / franchisor contravened a relevant civil remedy provision). For obvious reasons, reliance on the “reverse onus” made proving the employer’s / franchisee’s contravention much easier for the FWO.

The Court’s key findings

The Full Court of the Federal Court granted BDH leave to appeal, noting that the interplay between the franchisor liability and reverse onus provisions was a significant issue with “ramifications beyond this proceeding” and one that required certainty. However, the Court ultimately dismissed the appeal, upholding the primary judge's decision that the FWO could rely on the “reverse onus” in proving the first element of franchisor liability.

The Court found that an applicant, such as the FWO, can rely on the reverse onus in section 557C of the FW Act to establish the primary contravention against the employer/franchisee, which is the first step in proving a franchisor’s liability under section 558B.

In reaching this decision, the Court made the following key points:

• Section 558B is a form of accessorial liability.

The Court found that Parliament intended section 558B to be a form of accessorial liability, supplementing the existing provision in section 550. It was designed to provide a more tailored mechanism to address the specific relationship between franchisors and franchisees.

• A franchisor’s liability is derivative from the liability of the employer / franchisee.

A franchisor’s liability is derived from the contravention of the employer / franchisee. Therefore, the mechanism used to prove the franchisee's contravention (including by reliance on the reverse onus in section 557C) is sufficient to establish the first element of the case against the franchisor. The applicant does not need to prove the contravention against the franchisor (again) without the assistance of the reverse onus.

• The legislative purpose supports this interpretation.

The Court examined the legislative history of the provisions, noting that sections 557C and 558B were introduced to protect vulnerable workers from exploitation, with the former protecting workers where employers fail to keep proper records. Allowing the reverse onus to apply in establishing franchisor liability is consistent with this purpose and avoids potentially inconsistent factual findings in respect of the franchisor and employer / franchisee.

The four practical scenarios when s 557C might apply in establishing a franchisor’s liability

One of the practical implications of this ruling is that a franchisor is particularly vulnerable to the way in which an employer / franchisee might choose to run their defence against allegations of wage compliance failings. The Court outlined several scenarios in which the first element of franchisor liability under section 558B(1)(a) (ie a civil remedy contravention by the employer / franchisee) might be satisfied, which might then leave the franchisor open to a ruling against it. These scenarios included:

• An admission.

The employer / franchisee might admit to the contravention and consent to orders being made against it.

• A contested finding.

The employer / franchisee might be a party to contested proceedings and the court might make a finding that the employer / franchisee contravened a relevant civil remedy provision. (If the franchisee successfully defends the allegations, then the case against the franchisor must also fail).

• A non-participating employer / franchisee.

The employer / franchisee might be a party to the proceedings but does not participate in the proceedings (for example, because it is in liquidation, as was the case here). An applicant such as the FWO can still rely on section 557C to establish the contravention against the non-participating employer / franchisee.

• The employer / franchisee is not a party in the proceedings at all.

The employer / franchisee might not be a party to the proceeding at all. The Court noted that section 558B(6) makes it clear that orders do not need to be sought or made against the employer / franchisee for a franchisor to be found liable.

The Court also held that, to ensure procedural fairness, it may be open to a franchisor to take on the burden of disproving the allegations against the franchisee, although it acknowledged that the making of this forensic choice in the proceedings may be rare.

Practical implications for franchisors

This decision reinforces that franchisors must be proactive in ensuring their franchisees comply with workplace laws. The FW Act effectively imposes a positive duty on franchisors to prevent wage theft within their networks.

To mitigate liability, and to rely on the “reasonable steps” defence in section 558B(3), franchisors should implement the following measures:

• Conduct regular audits.

Implement a system of regular and thorough audits of franchisee payroll systems, employee records, and pay slips to identify and rectify any non-compliance issues.

• Provide comprehensive training.

Ensure franchisees are provided with comprehensive training and easy-to-understand resources regarding their obligations under the FW Act, modern awards, enterprise agreements, and other workplace laws. This directly relates to the requirement to take action to ensure the franchisee has reasonable knowledge of their requirements.

• Establish a complaints mechanism.

Create clear and accessible arrangements for receiving and addressing complaints about potential underpayments from the employer / franchisee employees.

• Ensure there are compliance mechanisms in franchise agreements.

Ensure that franchise agreements contain clauses that require franchisees to comply with all workplace laws and provide the franchisor with sufficient power to monitor and enforce this compliance.

• Act promptly when non-compliance is identified.

When non-compliance is identified, a franchisor must take prompt action. As alleged in this case, simply identifying an issue via an audit and then failing to take further steps when a franchisee refuses to cooperate is unlikely to be considered “reasonable steps”. Follow-up is critical.

Ultimately, the decision serves as a strong reminder that the legal and reputational risks for franchisors associated with franchisee non-compliance are significant. A proactive and vigilant approach to wage compliance in the network is an essential part of managing legal risk.