29 March 2023

First FWO prosecution against franchisor

FWO has started its first ever court action against a franchisor for breaches of the FW Act by 8 of its franchisees.
Australia Corporate/Commercial Law
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The Fair Work Ombudsman ("FWO") has commenced its first ever court action against a franchisor for breaches of the Fair Work Act 2009 ("FW Act") by eight of its franchisees, including the alleged underpayment of workers.

While the franchisor did not directly commit the breaches, the FWO alleges that it is legally responsible because, in circumstances where it had been on notice for many years about its franchisees' compliance issues, it should have reasonably known that its franchisees would underpay their workers and breach other requirements of the Act.

The FWO has not taken court action against the individual franchisees involved in the breaches, as they have back paid the workers in full following a FWO audit. Despite the underpayment being rectified, proceedings have been brought against the franchisor seeking penalties be imposed for the breaches.

The FWO alleges the franchisor was on notice of the potential for underpayment issues at its franchisees because:

  • an enforceable undertaking had previously been entered into between the franchisor and FWO;
  • audits had been undertaken by the FWO;
  • the franchisor had knowledge of its franchisees' financial circumstances; and
  • the franchisor was aware of the franchisees' limited English and limited awareness of workplace laws.

Further, the franchisor had itself (in its capacity as a director employer) engaged in the underpayment of employees. In November 2022, the FWO secured a Federal Court judgment against the franchisor with respect to eight direct employees for failing to pay the correct Award rates, keep proper records, provide payslips, pay employees for accrued but untaken annual leave on termination of employment, pay superannuation and pay overtime and penalty rates.

The franchisor was ordered to pay-back the underpayment of approximately $470,000, as well as a further $475,200 as a penalty. The penalty represents one of the highest penalties secured by the FWO against a single company.

Key takeaways - consequences for franchisors

The proceedings that have now been commenced by the FWO are a warning to all franchisors that they can be held accountable and must take a closer look at the conduct of their franchisees, or else risk having substantial penalties imposed against them.

Franchisors should be on the "front foot" when it comes to underpayment of wages or breaches of the Act in relation to their franchisees.

Franchisors should regularly conduct internal audits into franchisees' payment practices. If a franchisor notices an underpayment issue within its franchisee organisation, it should:

  • locate pay records and determine how many employees were underpaid and for how long;
  • calculate the full entitlement, amounts actually paid and the gap;
  • make back-pay arrangements and consider a communications strategy;
  • put in place systems to keep up-to-date with wage increases; and
  • consider whether there are any ancillary underpayments, such as superannuation, taxes and bonuses which need to be paid.

Read our blog about what to do if you notice an underpayment issue within your organisation.

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