In a landmark decision, the Federal Court of Australia imposed a $1.44 million penalty on 85 Degrees Coffee Australia Pty Ltd for failing to meet its’ responsible franchisor duties’ under the Fair Work Act 2009. Justice Bromwich, who previously issued a record $10.34 million penalty against the Commonwealth Bank in February 2024, emphasized the necessity of deterring unlawful conduct within the franchise sector.

The Decision

Franchisor, 85 Degrees Coffee Australia Pty Ltd, is on the receiving end of a penalty that was designed to punish and deter other Franchisors from failing to give the expected levels of attention, consideration, and action, to the duties a Franchisor is required to exercise under the Fair Work Act 2009.

• The reasons for the fine included:
• The Franchisor had a history of compliance failures (2015 FWO undertaking);
• The Franchisor had a history of failing to pay its own staff (2022 FWO Prosecution with a $475K fine);
• There was a ‘systematic failure to ensure compliance within its franchise network’;
• The Franchisor had effectively ‘given up’ on seeking to have its franchisees achieve compliance;
• The Franchisor knew about a large portion of the contraventions, and it knew, or should have known of, its obligations more generally.

The fine could have been more had his Honour included elements in the fine for specific deterrence.  However, he did not consider this to be necessary in circumstances where the Franchisor had chosen to remain registered in Australia and ‘face the music’ in respect of the proceedings and the ultimate fine (the Franchisor had elected to commence withdrawal from the Australian market after the 2022 FWO Prosecution).

Franchisors to Manage Risk

This decision reminds Franchisors that they need to take all reasonable steps to manage and address the risks associated with running a Franchise network.  A Franchisor may still be prosecuted even where a Franchisee has not been prosecuted

Things that will factor in, to reasonable steps:

• the scope and resources available;
• the ability to influence or controlthe franchisee’s conduct;
• any action taken to ensure that the franchisee had a reasonable knowledge and understanding of their legal obligations;
• arrangements for assessing compliance;
• arrangements for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions;
• arrangements (whether legal or otherwise) with the franchisee to encourage or require the franchisee to comply with the workplace laws.

Remember Commonwealth criminal underpayment laws commence on 1 January 2025, with increased penalties and potential for incarceration in the worst cases so now is the time to review the arrangements you have in place and consider whether you are doing enough to manage the legal risks.

Bromwich decision: Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576

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The author would like to thank Millie Papworth and Zoe McQuillan for their contribution to this article.