This decision is the second time the Fair Work Ombudsman (“FWO”) has tested the reach of the liability provisions for franchisors under the Fair Work Act 2009 (“FW Act”). The FW Act was amended in 2017 to introduce new provisions specially addressing the responsibility of franchisors for their franchisees where there is a breach of the FW Act.  

Franchisors be alert, not alarmed 

The franchisor faced prosecution by the FWO for alleged employee underpayments by the franchisee (now in liquidation) totaling $1.25m. The FWO sought to make the franchisor responsible for half of this amount. It was alleged by the FWO that the franchisor was aware of the underpayment issue but failed to act.  

In this case before the Full Court of the Federal Court (“Court”), the franchisor sought to challenge that the franchisee’s lack of employee records relating to the underpayment resulted in the franchisor’s liability.  

The Court confirmed how the franchisor liability provisions operate alongside the presumption of liability when adequate records are not provided. The Court stepped through these provisions under the FW Act including:  

1. The franchisor liability provisions under the FW Act apply if a franchisor knew, or could reasonably have been expected to have known, that a contravention by a franchisee was likely to occur.
2. The presumption that where there is an underpayment situation, a claimant (such as the FWO) may point to the failure of an employer (in this case the franchisee) to keep records as evidence that the underpayment occurred. 
3. The failure to keep records can also be evidence of underpayments for which the franchisor is liable.

Franchisors should be aware that if a franchisee fails to keep required employee records, the law assumes that the underpayments occurred. Critically, the presumption can also apply to the franchisor, even if it had no direct access to the franchisee’s records. 

Key actions  

Even though it was the franchisee, and not the franchisor, that failed to keep the prescribed records, a responsible franchisor can be required to prove that its franchisee had not underpaid its employees. Without documentary evidence of the payments that were made to the employees, and any assistance from a franchisee, a franchisor will find it very difficult to disprove the alleged underpayments. 

For franchise models to be successful it will be important that franchisors and franchisees work co-operatively to build robust systems which foster a compliance culture. This means franchisors need to be well appraised of the needs and responsibilities of franchisees, and franchisees need to be receptive to following compliance directions of franchisors.  

This co-operative compliance culture will include the following principles: 

• Compliance must be embedded in the franchise model: franchisors should ensure their terms incentivise compliance initiatives and penalise deliberate non-compliance. 

• Centralise record-keeping obligations: if records are not kept the law assumes that underpayments occurred. Accordingly, it is important that there is a centralisation of record-keeping obligations. 

• Create fit for purpose early warning systems to identify potential issues proactively: in the absence of records, a franchisor may be left with little to no evidence to rebut underpayment allegations. This creates a significant risk, particularly where a franchisee is no longer operating or is uncooperative. Franchisors must ensure they have systems in place to monitor and identify non-compliance at the earliest opportunity.  

• Establish comprehensive systems to monitor and review franchisee compliance: such systems will help franchisors ensure compliance with workplace obligations, for example, via regular payroll audits, award coverage and classification reviews, and, mandatory reporting requirements. Such systems should include the provision of education and ongoing training and support for HR queries and issues. 

You can read more about the first prosecution by the FWO of a franchisor for breaches of the FW Act in our article here.