Federal Court Confirms Franchisors Presumed Liable Or Franchisee Breaches

The Full Federal Court's (Full Court) dismissal of an appeal by Bakers Delight Holdings Ltd (Bakers Delight) has further strengthened the Fair Work Ombudsman's (FWO) ability to pursue franchisors for workplace breaches by franchisees - confirming the heightened risks to franchisors associated with contraventions of workplace laws in their networks.

Rather than addressing the substance of the underlying underpayment allegations (which were not contested for the purposes of the appeal), the Court addressed a critical procedural question with broad implications for franchisors: do 'reverse onus' provisions apply to derivative liability proceedings where a franchisor is sought to be made responsible for franchisee contraventions? In Bakers Delight Holdings Ltd v Fair Work Ombudsman [2025] FCAFC 144, handed down on 16 October 2025, the Full Court confirmed that they do.

Against the backdrop of increased regulatory attention towards large-scale corporate underpayments more broadly, the decision expands the liability exposures faced by franchisors in an already heavily scrutinised space.

In this Insight, we discuss the key takeaways from the decision and outline practical steps franchisors can take to mitigate the risks of non-compliance within their networks.

Background: FWO v Make Dough Enterprises and Bakers Delight

In 2023, the FWO issued proceedings against Make Dough Enterprises Pty Ltd (Make Dough), a franchisee which operated three Bakers Delight bakeries in Tasmania (which is now in liquidation), and Bakers Delight as responsible franchisor. The ongoing proceedings concern alleged underpayments of 88 employees' entitlements (totalling A$642,162.66) and record keeping contraventions by Make Dough.

Through 'extended liability' provisions in the Fair Work Act 2009 (Cth) (Fair Work Act), the FWO sought to attribute liability to Bakers Delight as a 'responsible franchisor'. Under the provisions, a 'responsible franchisor'¹ is liable for its franchisee's contraventions if it (or an officer) knew, or could reasonably have been expected to have known, that a contravention by the franchisee was likely to occur.

Those provisions were introduced by a package of amendments - the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) - in response to "increasing community concern about the exploitation of vulnerable workers (including migrant workers) by unscrupulous employers".²

Crucially, the FWO sought to rely on the extended liability provisions in conjunction with a powerful 'reverse onus' provision contained in section 557C of the Fair Work Act. The effect of the provision is that employers bear the (evidentiary and legal) onus of disproving allegations of Fair Work Act contraventions (including underpayments) where they fail to comply with their record-keeping obligations, unless there is a 'reasonable excuse' for that failure. The provision, though often relied upon by the FWO in penalty proceedings to prove contraventions by employers, had not been used in derivative liability proceedings against a responsible franchisor in relation to contraventions by a franchisee.

As such, the proceedings are a test case on the interaction between the 'reverse onus' and franchisor liability mechanisms in the Fair Work Act.

To resolve the uncertainty ahead of trial, the parties therefore requested the trial judge - Justice McElwaine - to pause the proceedings and determine this separate question of law. In December 2024, His Honour issued a specific ruling on the separate question, determining that the FWO could rely on the reverse onus provision to establish a franchisee contravention in the proceedings against the franchisor, Bakers Delight. As such, even though it was the franchisee - and not Bakers Delight - that failed to keep the requisite records, it fell to Bakers Delight to prove that the franchisee had not underpaid its workers. Bakers Delight filed an appeal against the ruling on this point of law, arguing that the FWO was required to prove contraventions by the franchisee without the assistance of section 557C.

The appeal decision

The Full Court unanimously rejected the appeal, ruling that section 557C was not confined to proceedings issued directly against an employer or franchisee.

In particular, the Full Court rejected Bakers Delight's argument that the rationale behind section 557C meant it should not extend to franchisors. The Court emphasised that the "whole point" of the extended liability provisions was to impose liability on "those franchisors which had the capacity to supervise and affect the performance of their franchisees".

The Full Court saw no reason why that should not apply to a franchisee's contravention of its record-keeping obligations, stating that it was "appropriate to sheet home to a franchisor legal responsibility" for its franchisee's failure to meet its obligations under the Fair Work Act, including those regarding record keeping and the payment of wages.

Despite Bakers Delight's objections that it would be unjust to impose liability on a "blameless franchisor", the Full Court ruled even if "blame" was a relevant consideration - which it doubted - franchisors would only be liable where they failed to properly supervise the franchisee in any case.

As such, the Full Court concluded that the reverse onus under section 557C would apply to a franchisor, even where the franchisee has gone into liquidation and left allegations of record keeping or wage contraventions undefended.

Implications

The decision is the second to consider the application of the extended liability framework for responsible franchisors, following Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576. In that case, global Taiwanese-based coffee chain 85 Degrees Café was penalised A$1.44m after being found liable for its franchisees' contraventions of the Fair Work Act and relevant modern awards, including failures to pay various minimum entitlements. However, Bakers Delight Holdings v FWO is the first time that a full court has been asked to rule on the application of section 557C to franchisor proceedings.

Off the back of the Court's ruling on that point of law, the Bakers Delight case will now proceed to a substantive trial before the Federal Court on 21 November 2025. In the interim, franchisors should consider the following key implications arising from this decision:

• Impacts of poor franchisee record-keeping reverberate to franchisors. The decision confirms a responsible franchisor can suffer the consequences of non-compliant record-keeping by its franchisees. That is, where franchisees fail to keep prescribed records of entitlements required to be provided to employees, it can be presumed that the franchisee failed to provide that entitlement for the purposes of imposing liability for that failure on the franchisor. In the absence of documentary evidence as to the payments made to employees, that will be a difficult presumption to rebut. This is particularly significant where a franchisee is in liquidation or is otherwise unable to (or does not) take steps to contest allegations it underpaid minimum entitlements.
  
• Increased FWO enforcement activity. The decision is likely to embolden the FWO's regulatory efforts in the franchising sector. Franchisors can expect heightened scrutiny of compliance by franchisees and strategic litigation against franchisors aimed at holding them accountable for breaches within their networks.
  
• Greater need to take 'reasonable steps': The Full Court's decision paves the way for the FWO, unions and employees to establish the facts underpinning underpayment allegations without needing to undergo burdensome forensic processes (such as discovery). In light of this, it is now particularly important that franchisors can avail themselves of the 'reasonable steps' defence, which may represent the main avenue for avoiding the imputation of liability to franchisors.Unless they take 'reasonable steps' to prevent contraventions by franchisees over whom they have influence or control, it will be very difficult for franchisors to avoid liability where there are defective record-keeping processes by those franchisees. We expect that what constitutes 'reasonable steps' will be tested in the substantive trial of this matter and in future decisions.
  
• Higher penalties for serious contraventions: Recent increases to maximum civil penalties for underpayments further enhance the risk profile associated with workplace breaches by franchisees. Franchisors may face penalties of up to A$4,950,000, or three times the value of the underpayments (whichever is greater). Regardless of whether penalties are imposed, franchisors will invariably be required to remediate their franchisees' contraventions by making rectification payments to affected employees.

Next steps for franchisors

To mitigate the elevated risks of non-compliance across their networks, franchisors should consider taking proactive steps to:

• Implement robust monitoring systems and promote compliance with record-keeping obligations. Establish comprehensive systems to monitor franchisee compliance with workplace obligations, including regular payroll audits, award coverage and classification reviews, mandatory reporting requirements and early warning systems to identify potential issues. In particular, franchisors should take steps to ensure rigorous compliance with record-keeping obligations, so that they avoid exposure to the statutory 'reverse onus' in the Fair Work legislation and remain well-positioned to handle regulatory engagements.
  
• Strengthen franchise agreements: Review franchise agreements to ensure they include specific obligations to foster compliance, including record-keeping and reporting requirements that exceed minimum legal standards, audit rights and remediation procedures for identified non-compliance. In practical terms, franchisees will only be equipped to institute compliance measures where they have the resources to do so. In this regard, franchisors should ensure their terms with franchisees do not place undue financial pressures downstream such as to encourage cost-cutting on compliance and wages.
  
• Provide ongoing training and support. Provide mandatory training to franchisees and their managers in addition to other online resources (such as pay calculators and compliance checklists) and dedicated support channels for franchisees to seek guidance. In our view, merely informing franchisees of their obligations is unlikely to suffice as 'reasonable steps'. Instead, franchisors should consider regular training, provision of meaningful guidance to franchisees, and assistance with design and implementation of compliance mechanisms to ensure that breaches are promptly identified and addressed.
  
• Consider centralised systems. Where appropriate to the franchise model, consider implementing centralised payroll systems or oversight, approved payroll providers, or standardised rostering systems with built-in compliance checks.
  
• Maintain comprehensive documentation. Document all compliance support provided to franchisees, including training sessions and attendance, audit reports and findings, and any remediation plans and outcomes. In the event of underpayment proceedings, this documentation will likely be critical for establishing the 'reasonable steps' defence.
  

Footnotes:

¹ That is, a franchisor with a 'significant degree of influence or control' over the franchisee entity's affairs.

² Explanatory Memorandum to Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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