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Franchisor fined $1.4m for breaches

A coffee shop franchisor has been fined $1.44 million for underpayments by its franchisees, in the first case brought by the Fair Work Ombudsman (FWO) against a franchisor.

Sydney café chain 85 Degrees was found legally liable, as a “responsible franchisor entity” under the Fair Work Act 2009 (Cth), for contraventions by eight of its 85C Daily Café franchisee-operated outlets in Sydney in 2019.

The franchisees underpaid employees’ entitlements in relation to minimum wages, casual employment loading, penalty rates, overtime, breaks between shifts allowance, laundry allowance, and annual leave on termination; and failed to keep employment records, pay regularly and provide payslips.

The FWO argued that although 85 Degrees did not directly underpay nine workers a total of $32,321, it was legally liable for the contraventions because it should reasonably have known that its franchisees would underpay the workers or commit similar contraventions.

It also argued 85 Degrees was legally liable for the payroll contraventions that occurred across those outlets and affected 20 workers (including the nine underpaid). The staff – who were engaged in cashier, baker and kitchenhand positions – included young workers and visa holders.

The need for the company to take action to address underpayment and record-keeping contraventions in its network was the subject of an Enforceable Undertaking between the company and the FWO in 2015.

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In his Federal Court judgment handed down on 4 June, Justice Bromwich described how 85 Degrees “first contravened as an employer, entered into an enforceable undertaking to desist, contravened further as an employer, and then with a change to a franchise model, failed to prevent its franchisees replicating substantially the same conduct”.

“Not to prevent such conduct, or genuinely and substantially attempt to do so, when it must have known, or at least should have known, there was a real risk of its franchisees engaging in like conduct, must be viewed as deserving the strongest of deterrent responses.  None of the contraventions were “one-offs” in any meaningful way,” he said.

“Secondly, 85 Degrees did not ultimately find a way of achieving compliance by its franchisees, but rather gave up and has not really tried to do so at all. 

“Thirdly, 85 Degrees had actual knowledge of the contraventions throughout three-quarters of the contravening period. Failures by franchisors who are aware that contraventions are occurring within franchises, and yet fail to take adequate steps to address them, must be met with a strong deterrent response.

“Considering all of the principles summarised above, and the context of the industry in which it occurred, this is not a case in which the need for deterrence, especially general deterrence, is other than of the utmost importance.”

Justice Bromwich said deterrence was in part, not just to “encourage an upward spiral of compliance, but also helping to stave off a downward spiral of non-compliance”.

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“In the franchise context, it must not be seen as acceptable for franchisors to tolerate, or turn a blind eye to, franchisee contraventions as an ordinary part of business,” he said.

“The clear legislative intention is to encourage compliance by making franchisors responsible for non-compliance as well the employer franchisees.  Slippage on all or any of the entitlement obligations and related record keeping obligations gives contravenors an immediate competitive advantage, and those who comply a competitive disadvantage, both ways extending to franchisors.

“Compliance virtue becomes a commercial vice, and compliance vice becomes a commercial virtue.  Sufficiently severe sanctions are needed to prevent this from being the case.”

The coffee shop chain was given 60 days to pay the penalty.

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