For the first time a responsible franchisor entity has been penalised under section 558B of the Fair Work Act 2009 (Cth) for failing to take reasonable steps to prevent its franchisees from breaching the Act.

On 4 June 2024 85 Degrees Coffee Australia Pty Ltd (85 Degrees) was found to have “systematic[ally] fail[ed] to ensure compliance within its franchise network”. The Fair Work Ombudsman (FWO) secured a total of $1.44 million in penalties against 85 Degrees in relation to contravening conduct of eight franchisee operated outlets in 2019. The conduct included underpayments and record-keeping contraventions. The individual underpayments of the nine affected workers ranged from $239 to $15,198 and totalled $32,321 across the eight outlets. The underpayments were rectified by the franchisees. The total penalty against 85 Degrees is the third highest ever secured by the FWO.

Section 558B commenced in 2017 and is intended to protect workers within franchise networks from violations of the Act relating to payment of correct wages and other entitlements. The section provides that a “responsible franchisor entity” will be liable if it (or any of its officers) knew or could reasonably be expected to have known that:

a) the violation by the franchisee entity would occur; or
b) a violation by the franchisee entity of the same or a similar character was likely to occur,

unless, as at the time of the violation, the franchisor had taken “reasonable steps” to prevent a violation of the same or a similar character.

The maximum civil penalty is AU$93,900 per violation for corporations (although a lesser penalty applied to 85 Degrees given the timing of the contraventions and increase in the value of a Commonwealth penalty unit since that time).

The FWO had commenced two proceedings against 85 Degrees previously for contraventions of its obligations in relation to its own employees taking place between 2016-2017. 85 Degrees was penalised a total of $475,200 in connection with underpayments to its employees totalling $429,393.18. This repeated offending was referenced in the judgement in the later proceedings under section 558B.

Justice Bromwich found there had been “repeated contravening conduct by 85 Degrees itself and later in failing to take reasonable steps to prevent its franchisees doing more of the same”.

Due to the penalties incurred, 85 Degrees abandoned its business in Australia. Justice Bromwich stated that “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”.

The repetition of the offending resulted in a significant total maximum civil penalty. His Honour noted that the risk of future contraventions by similar participants is high, therefore a substantial penalty was required for the purpose of general deterrence.

The case demonstrates the willingness of the FWO to take action under section 558B, despite losses to employees being relatively modest (and being corrected by the franchisee employers), in circumstances in which a) a franchisor knows or should know of compliance issues within its network; and b) the franchisor has made no or little effort to address such issues. Detering future contraventions is a significant enforcement consideration.

Franchisors should seek advice on their obligations to a) educate and assist franchisees; b) monitor compliance; and c) respond appropriately to Fair Work Act compliance issues.