Franchisor faces liability for its franchisee underpaying staff

Australia’s workplace regulator is continuing to show its determination to hold franchisors liable for franchisee staff underpayments.

What’s happening?

A large Australian-owned franchise chain is facing prosecution by the Fair Work Ombudsman (FWO) for failing to prevent and rectify its franchisee having underpaid workers. This will mark only the second time the FWO will seek to hold a franchisor liable for the alleged unlawful conduct of a franchisee.

It is alleged that the franchisee (who has now closed its stores and entered in liquidation) underpaid 142 workers a total of AUD1.25 million across three stores between July 2017 and October 2020. These underpayments related to minimum wages, weekend and public holiday penalty rates, overtime rates, leave entitlements and minimum shift pay.

The FWO is seeking that the Federal Court order the multinational franchisor rectify the underpayments for an estimated amount of AUD640,000, being about 50% of the amount owed to staff.

It is alleged that the franchisor knew or should have reasonably known about the franchisee's underpayments and non-compliance, from an audit conducted in February 2019. The FWO alleges that the franchisor remained idle when the franchisee refused to take measures to resolve these issues. In addition to repaying the workers their entitled amounts, the franchisor and franchisee are likely to be handed significant penalties. The case will be a significant test of the extent to which a franchisor is expected to compel a franchisee to rectify wage issues.

What’s next?

The matter is now progressing through the courts. For both franchisors and franchisees this is an important time to be reviewing employment-related compliance audit processes, franchise agreement terms and mechanisms for enforcement.

Our team of franchise and employment lawyers are keen to help so don’t hesitate to reach out.