Franchisor Responsibility and changes to franchise bargaining

In 2017 a number of new provisions relating to franchise businesses were introduced into the Fair Work Act. The new laws:

• included definitions of franchisee entity and responsible franchisor;

• made responsible franchisor entities liable for certain franchisee contraventions of the Fair Work Act in circumstances where the responsible franchisor:

  • should have been reasonably aware of the contraventions; and

  • could reasonably have taken action to prevent such contraventions from occurring;

• will not apply unless:

  • a responsible franchisor entity has failed to take reasonable steps to prevent the contraventions;

  • the franchisor exercises a significant degree of influence or control over the franchisee entity’s affairs; and

• extend to sub-franchisors and franchisor holding companies.

The 85 Degrees Decision in June 2024

The Federal Court handed down a decision in June 2024 imposing a $1.44 million fine on 85 Degrees, a coffee chain franchisor, under the 2017 laws. The employer was a repeat offender bound by an enforceable undertaking with the Fair Work Ombudsman in 2015. The 2015 contraventions were dealt with prior to the 2017 responsible franchisor laws.

The Contraventions

The 85 degrees franchisor was fined for contraventions by eight franchisees. Among other things, many of the contraventions involved failures of franchisees to pay entitlements under various modern awards such as penalty rates, overtime rates and allowances. The franchisor was also held liable for a number of breaches of record-keeping obligations by franchisors. Most underpayments involve more than simply paying below the minimum rate of pay.

Interestingly, the table of contraventions shows that the nature and extent of the issues varied from one franchisor to another. In many cases, businesses interpret their obligations under modern awards differently from one another - especially in the absence of the right advice form an industrial relations or employment lawyer.

Franchisor Liability

The court made a number of observations about the role of the franchisor in the contraventions. It noted that the franchisor could reasonably be expected to have known that the operations of at least two specific stores were not compliant. This was particularly likely given 85 Degrees had moved from a centralised business model to a franchise model in 2015.

The court also observed that English was not the first language of many of the franchisees. Most of the franchisee owners did not seek appropriate industrial compliance advice when setting up their franchisee businesses. At the same time, the franchisor had the benefit of extensive rights to review and audit the franchisee entities.

Franchisor Obligations

The 85 Degrees franchisor wrote to franchisees to inform them of their obligations to comply with applicable modern awards. It also provided the contact details of an industry association for further information. However, it did not develop a consistent and comprehensive action plan for franchisees, nor support and monitoring of the implementation of such a plan (but stated that this was in development during the Fair Work Ombudsman’s investigation).

THE ACTION PLAN

Successful wage compliance starts at the top. In other words, franchise businesses which place value on wage compliance are inevitably more well-equipped to achieve and maintain compliance. Just some of the key items in any franchisee action plan include:

1. ensuring operational managers, payroll, etc implement the correct modern awards - and the correct interpretation of each modern award that applies;

2. using up-to-date, compliant employment contracts;

3. complying with specific rostering requirements;

4. rostering part-time employees to work at contractually agreed times and days (where required);

5. keeping records of all rosters, time sheets, flexibility arrangements and employment contracts - as well as any variation of these;

6. providing training to key management and administrative staff within both franchisor and franchisee entities; and

7. arrange for an industrial relations or employment lawyer to conduct regular wage compliance reviews or wage compliance audits.

Enterprise Agreements

The Closing the Loopholes reforms introduced s 172 (5A) to the Fair Work Act. This provision allows franchisors and franchisees to bargain together for an enterprise agreement. This means that the one enterprise agreement covers each of the related entities of the franchisor and franchisees.

Whilst it is important to consider a broad range of factors before deciding to implement a first-time enterprise agreement, there may be some compliance benefits having a single enterprise agreement for all franchises. These benefits might include:

1. unifying the franchise businesses in the development and implementation of terms and conditions of employment;

2. bargaining for terms and conditions which can be customised to suit the particular franchise businesses;

3. facilitating better workforce mobility across entities;

4. economies of scale developing and implementing payroll systems and practices.

Hennings Lawyers can develop a customised Action Plan for franchisors and franchisees which includes core training modules. We also offer wage compliance reviews and audits which utilise powerful technology to provide one-off or regular checking across franchise businesses. Want to learn more? Tell us how we can help you.