Australian court confirms when a franchisor is liable for franchisee workplace breaches

The court’s decision to reject an appeal by a franchisor, Bakers Delight Holdings Ltd (BDH), forms part of a broader enforcement action part of a prosecution by the Fair Work Ombudsman (FWO) against a Bakers Delight franchisee, its directors, and BDH.

Raising the stakes for franchisors

This decision is a pivotal moment in Australian employment law. It confirms that franchisors can be held liable for breaches by franchisees even when they lack direct control, due to the reverse onus provisions in relevant legislation. It raises the stakes for franchisors, compelling them to take a more active role in ensuring compliance across their networks. The ruling also empowers regulators to pursue franchisors more effectively, reinforcing the broader policy goal of protecting vulnerable workers in franchised businesses.

Franchising arrangements have been a focus of the FWO for several years, stemming from high-profile examples of systemic breaches of the Fair Work Act 2009 (FW Act) by franchisees where liability for the breaches could not be attached to franchisors. The introduction of amendments the FW Act in 2017 imposed far greater responsibility and legal risks to franchisors.

As part of the proceedings, BDH sought clarification from the court on whether the burden of proof, typically placed on employers who fail to meet strict record-keeping obligations, could also apply to franchisors facing claims of workplace law breaches committed by their franchisees. In upholding the primary judge’s decision, the Full Federal Court confirmed that the reverse onus does apply. This means a franchisor is heavily reliant on its franchisee making, keeping and providing proper records, as mandated under the FW Act This has become increasingly challenging in light of another recent Federal Court ruling, which makes it harder for franchisors to defend themselves when they lack access to the necessary employment records held by their franchisees. As a result, franchisors may find themselves vulnerable, being potentially liable for breaches they had limited ability to prevent or control.

If a franchisee fails to provide adequate records or does not engage in the legal process, the franchisor then faces a significant disadvantage in defending itself. Without the necessary documentation or participation from the franchisee, the franchisor may struggle to refute claims and could be held responsible for breaches it had little control over.

Background 

This issue arose in the context of a prosecution by the FWO against:

• Make Dough Enterprises Pty Ltd, a franchisee operating three Bakers Delight stores in Tasmania, which was alleged to have contravened the FW Act and Regulations by underpaying staff and not complying with record keeping obligations;
• two directors of the franchisee entity as “knowingly involved individuals” to the alleged contraventions under the FW Act; and
• BDH as the “responsible franchisor” under the FW Act. 

The FW Act imposes liability on franchisors whose franchisees contravene the National Employment Standards, awards or enterprise agreements, and record keeping obligations, where the franchisor knew, or could reasonably be expected to have known, that a contravention by the franchisee would occur. Franchisors that take reasonable steps to prevent the contravention have a defence against such liability.

BDH sought clarification on whether the reverse onus regarding employers who fail to maintain proper employment records could also be used to establish a franchisee’s breach when pursuing legal action against a franchisor. BDH argued that this evidentiary burden should only apply to employers, and that the FWO bore the burden of establishing contraventions against the franchisee, without relying on the reverse onus for the purposes of successfully prosecuting a franchisor. BDH was unsuccessful at both first instance and on appeal.

The court said a franchisor cannot simply act “blameless” when certain conditions are met. In such cases, the franchisor will be liable for failing to exercise appropriate supervision and control of the franchisee. 

The court said: “[The evidentiary rule about record keeping] is directed towards the proof of a contravention by an employer/franchisee, not a franchisor.… [the provision outlining franchisor liability] remains in its character an accessorial liability provision. Therefore, for a moving party to satisfy the requirements of [the franchisor liability provision], it is not necessary for that moving party separately to prove a contravention by the employer/franchisee without the assistance of [the evidentiary rule]”.

In other words, once a franchisee is found to have breached workplace laws, the franchisor can also be held responsible if they were involved or failed to take reasonable steps to prevent it. The franchisor’s liability doesn’t require a separate, second round of proof.

The franchisor’s flows directly from the franchisee’s breach. In coming to this view, the court said that the franchisor liability provision “was intended by Parliament to be a further form of accessorial liability, to strengthen the enforcement of the civil remedy provisions in the [FW Act] in circumstances where an employer was also in a franchisee arrangement, and it was objectively appropriate to sheet home to a franchisor legal responsibility for the failure of the employer/franchisee to meet its obligations under the [FW Act], especially as to record keeping, and payment of wages and provision of entitlements”.

Implications for franchisors 

This decision creates complexity for franchisors defending claims against them because they are largely beholden to the conduct of their franchisee in a FWO investigation, and the defence of a legal claim for primary liability. 

Unlike accessorial liability under the FW Act, where the accessory is typically a director or officer of the primary contravening entity, franchisors are separate legal entities that are unlikely to have the control over or influence of an accessory who has been charged. Accordingly, a franchisor has far less control over its own defence of a claim against it.

The best defence for a franchisor, or any employer, is proactive compliance. Franchisors should implement measures to satisfy themselves that franchisees are legally compliant, or at worst be in a good position to successfully argue the “reasonable steps” defence.

This can include:

• embedding compliance into franchise agreements and operational manuals;
• ensuring their own systems and processes are legally compliant, and that they are sufficiently knowledgeable about workplace laws;
• providing training and resources to franchisees about workplace laws;
• undertaking regular audits of franchisees’ compliance with relevant awards, enterprise agreements and record keeping obligations;
• understanding, and communicating to franchisees, the suitable workforce composition required for the franchisee’s operations;
• highlighting and rewarding examples among franchisees of good compliance with workplace laws; and
• assisting franchisees appropriately in any investigation or litigation for non-compliance with workplace laws to enable the franchisor to discharge the reverse onus.