Fair Work Breaches: Franchisor 85 Degrees Fined $1.44M
A prominent franchisor of coffee shops has been fined $1.44 million for underpayments by its franchisees, in the first case of this type brought by the Fair Work Ombudsman against a franchisor.
On June 5 2024, the Fair Work Ombudsman (FWO) secured penalties totalling $1.44 million against 85 Degrees Coffee Australia Pty Ltd for its failure to ensure that several Sydney franchise outlets paid their workers’ lawful entitlements. This marks the third-highest penalty ever secured by the FWO and the first use of the ‘responsible franchisor entity’ provisions under the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth).
The case involved underpayments of $32,321 to 9 workers at 8 85 Degrees-branded franchisee-operated outlets in 2019, in addition to other related breaches.
The Federal Court found that 85 Degrees should have known about the risks of such contraventions and failed to take reasonable steps to prevent them. This follows previous penalties of $475,200 in 2022 for similar breaches and an enforceable undertaking in 2015.
Justice Robert Bromwich criticised 85 Degrees for its repeated failures to ensure compliance, noting that the franchisor had actual knowledge of the contraventions for a significant period. He highlighted the need for strong deterrence to prevent future contraventions, particularly in the food retail industry affecting vulnerable workers.
‘In the franchise context, it must not be seen as acceptable for franchisors to tolerate, or turn a blind eye to, franchisee contraventions as an ordinary part of business,’ he said, noting that ‘sufficiently severe sanctions’ are required.
Takeaways for Franchisors
For franchisors, the 85 Degrees judgement contains a key lesson: franchisors need to proactively address compliance issues within their networks. The protecting vulnerable workers reform means franchisors can’t turn a blind eye to the activities of their franchisees.
85 Degrees had a high degree of contractual control over its franchise operations, and could easily check whether its franchisees were compliant (as well as take reasonable steps to correct non-compliance). Justice Bromwich found that certain features of 85 Degrees’ franchise agreements contributed to its compliance obligations.
- There was a mandated sales and marketing system for franchisees.
- There was a detailed operations manual for compliance with that system, which included minimum performance standards for franchisees.
- 85 Degrees provided required training to franchisee store managers and other staff.
- Franchisees were required to sell 85 Degrees products at specific prices.
- Franchisees were required to use certain equipment, PoS systems, and security systems.
- 85 Degrees had a right to inspect and audit franchisee records.
Justice Bromwich also noted that certain franchise business models could encourage or contribute to non-compliance (although that wasn’t the case for 85 Degrees). For example, overly high revenue cuts could mean franchisees are incapable of being profitable unless they underpay workers.
So, if you’re a franchisor, check whether you can reasonably monitor and manage franchisee compliance. Consider implementing a formalised assurance system – as illustrated by 85 Degrees, ignorance of franchisee behaviour isn’t a feasible excuse. Finally, make sure your franchise agreements don’t encourage non-compliant behaviour from franchisees.
For personalised advice, schedule a consultation with our IP, franchising and technology team. We’ve been guiding Queensland franchises through changing requirements for many years – find out how we can help you and your franchise network stay compliant.
- Email: law@belllegal.com.au
- Phone: (07) 5597 3366
