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Franchisor penailsed for contraventions of the Fair Work Act

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By Raynia Theodore, Principal, MST Lawyers and Eleanor DeMarzi, Lawyer, MST Lawyers.

 In the case of Fair Work Ombudsman v Yogurberry World Square Pty Ltd [2016] FCA 1290 (2 November 2016), the master franchisor of the “Yogurberry” frozen yogurt chain, its associated companies and director have been fined $146,000 plus costs for exploitative employment practices towards four Korean employees.

The decision emphasises that franchisors, which hold ultimate control over and are beneficiaries of their franchise networks, are at risk of liability for illegal conduct by franchisees.  Franchisors cannot hide behind corporate structuring and segregation of functions to avoid accessorial liability for involvement in franchisee contraventions.  Courts have broad powers to tailor orders in such cases, including audits encompassing all stores within a network.

Together with recent reports of gross workplace law breaches in convenience store and fuel franchises, this case provides another warning to franchisors to review and monitor compliance by franchisees.

The court’s decision

Yogurberry World Square Pty Ltd, the employer at the relevant World Square store, committed 15 contraventions of the Fair Work Act and Fast Food Industry Award, including underpayment of wages, loadings, penalty rates and allowances, unlawful deductions, failure to engage employees for minimum shifts, failure to pay superannuation and failure to keep records and issue payslips.  It received a $75,000 fine.

Secondary liability, for being accessories in these breaches, was imposed against other entities in the group of family companies operating the Yogurberry business which had knowledge of, and participated in, establishing pay rates, paying wages, determining hours and dealing with employment-related matters. 

A $25,000 fine was ordered against the head office and the master franchisor of Yogurberry in Australia, YBF Australia Pty Ltd, which operated the store at one point.  The payroll, accounting and logistical company, CL Group Pty Ltd, was also fined $35,000 and the director and part-owner of the companies were also fined $11,000.

The Respondents were ordered to commission a third-party audit to assess compliance and/or non-compliance with employment and record-keeping obligations relating to all employees and staff in all “Yogurberry” stores.  Further, the Respondents and all other directors were required to undertake training on employment obligations. 

Importantly, the four employees were young, vulnerable, foreign and spoke little English.  The Court noted that deterrence was needed in the fast food industry which commonly employs such workers.  An attempt by the Respondents to rely on their own English language difficulties and South Korean origin was dismissed by the Court which contrasted this with their complex corporate restructuring.

Critically, the Respondents had previously been put on notice by the Fair Work Ombudsman (FWO) with a formal caution and infringement notices concerning record-keeping and employee entitlements.

Additionally, the Respondents’ employment records were “scant”, sometimes comprising only negligible handwritten notes.  Justice Flick found it “disturbing” that the Respondents deliberately refrained from keeping proper records and disclosing financial information to frustrate investigations and gain financial benefit.

Risk mitigation for franchisors

Given escalating regulatory investigation of unscrupulous franchisees and legal reforms foreshadowed prior to the federal election to strengthen franchisor liability for franchisee breaches, franchisors must take responsibility for their networks and implement adequate systems to oversee record-keeping and compliance by franchisees.  Compliance systems, for workplace, consumer and taxation laws among others, need to be regularly updated and enforced by franchisors.

The array of contraventions declared by the Court highlights that franchisors must monitor all aspects of compliance and utilise comprehensive oversight systems that can be relied upon during investigations or proceedings.  The Judge’s persistent criticism of the Respondents’ insufficient financial records may lead to a more hard-line approach in future investigations.

Franchisors should consider for example providing training to franchisees, introducing uniform compliance systems, time-recording, and record-keeping for franchisees, conducting audits of franchises and taking action against franchisees for non-compliance, including issuing breach notices.

This is particularly so since liability for illegal activity by franchisees can be attributed to a franchisor, its officers and related companies if the franchisor has been found to be directly or indirectly knowingly concerned in, or party to, a contravention.  Franchisors may be liable for fines, unpaid entitlements and ancillary orders including audits, in addition to the reputational damage that will no doubt flow from such cases.  There will also be additional costs to the Franchisor is pursuing separate legal action against franchisees to recover any loss and damage.

While this was the FWO’s first financial penalty and audit award against a master franchisor, it is unlikely to be its last.

For more information on how MST Lawyers can you, please contact our Corporate Advisory and Franchising team at franchise@mst.com.au or on +61 3 8540 0200.