Did you know that a franchisor could potentially be liable for the conduct of its franchisee? This exact question is currently being tested in the Federal Court of Australia. In that case, the franchisor risks being liable for its franchisees non-compliance with workplace laws.
Franchisor Liability
In February 2023, the Fair Work Ombudsman (FWO) commenced legal action against 85 Degrees Coffee Australia Pty Ltd (85 Degrees) in the Federal Court of Australia, for alleged breaches by franchisees in its network, including the underpayment of workers and failing to comply with record-keeping and pay slip obligations. The FWO alleges that 85 Degrees is liable as a responsible franchisor entity because it should have known its franchisees would contravene workplace laws. This proceeding is significant as it is the first time that the Fair Work Ombudsman has commenced a legal action of this kind. Should the Federal Court find in favour of the Fair Work Ombudsman, it will set a significant precedent and put franchisors on notice that they cannot turn a blind eye to breaches of employment laws by its franchisees.
It is important to note that in this case, 85 Degrees gave an enforceable undertaking to the FWO in 2015 which includes a commitment by 85 Degrees to address underpayment and record-keeping contraventions by its franchisees. Such measures to address actual or potential contraventions include self-auditing and reporting requirements. Through a pro-active audit by the FWO, the alleged contraventions by 85 Degrees and its franchisees were revealed. This proceeding is still being determined by the Court.
The enforceable undertaking given by 85 Degrees to the FWO, while unique, does not mean that the FWO doesn’t have powers to monitor and enforce compliance with workplace laws. In 2017, the Fair Work Amendment (protecting Vulnerable Workers) Bill 2017 was passed, providing greater protection to employees who are underpaid or exploited by their employers.
The Franchise Relationship
If we put the 85 Degrees case to the side, it’s important to set out the franchise relationship to understand how and when a franchisor may be liable for conduct by its franchisee.
A franchise comprises of two separate entities, one being the franchisor and the other being the franchisee. Together, they tend to convey an appearance of one single entity to the general public. Despite the franchise agreement containing clauses that the two entities are separate, and the relationship does not constitute one of a partnership, employment or joint venture, franchisors may still have a responsibility for the conduct of their franchisees.
Australian Consumer Law
In a franchise relationship, franchisors generally have a say over how franchisees commercialise their goods or services. For example, franchisors typically provide marketing materials to franchisees to display at the business premises. In turn, franchisors can be directly in breach of consumer laws, or indirectly in breach by the conduct of their franchisees. Consumer protection laws are set out in schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian consumer Law).
If a franchisee carries out misleading or deceptive conduct, being a breach of the Australian Consumer Law, this gives rise to an action against the franchisee, as well as any other person “involved” in the conduct. In this context, the term “involved” is defined in the ACL as:
A person is involved, if the person has:
- aided, abetted or procured the contravention; or
- induced, whether by threats or promises or otherwise, the contravention; or
- been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
- has conspired with others to effect the contravention.
Need assistance? Contact us
If you’re a franchisor wanting to understand your risk exposure or a franchisee unsure of how you or your franchisor may be implicated by your conduct, please contact one of our expert lawyers at Taurus Legal Management on (03) 9481 2000 or info@tauruslawyers.com.au.