The Fair Work Ombudsman has secured penalties totalling $1.44 million against the franchisor of the '85 Degrees' brand in Australia for its "systematic failure to ensure compliance within its franchise network", including underpayments at a number of its Sydney franchisee outlets.
The Federal Court has imposed the penalties against 85 Degrees Coffee Australia Pty Ltd ('85 Degrees'), which operated a number of 85 Degrees-branded outlets in NSW and the ACT and was also the head franchisor of several franchisee-operated outlets.
The penalties are the third highest ever secured by the Fair Work Ombudsman.
The case is also the first time the FWO has in court used the "responsible franchisor entity" provisions of the Protecting Vulnerable Workers reforms to hold a franchisor to account for the conduct of its franchisees.
The Fair Work Ombudsman's legal action relates to workers, including a number of young workers and visa holders, employed at eight 85 Degrees-branded franchisee-operated outlets in Sydney in 2019. Nine of the workers were underpaid a total of $32,321.
While 85 Degrees did not directly underpay the workers, it has been held legally liable under the responsible franchisor entity provisions for the underpayment contraventions and various record-keeping and pay slip contraventions because it should reasonably have known, and from 1 April 2019 did know, its franchisees would commit those or similar contraventions and it did not take reasonable steps to prevent that from occurring.
The penalty comes after the FWO secured $475,200 in penalties against 85 Degrees in 2022 for exploiting young Taiwanese students in Sydney, and after FWO entered into an Enforceable Undertaking with the company in 2015 in response to underpayments and record-keeping contraventions.
Fair Work Ombudsman Anna Booth said the $1.44 million in penalties secured in the latest matter highlights that franchisors who know or could reasonably be expected to have known that a contravention by a franchisee would occur, and fail to take reasonable steps to prevent those contraventions, can face serious consequences.
"85 Degrees' conduct in this matter was completely unacceptable. The company had been on notice for some time about compliance issues in its network but failed to take reasonable steps as a responsible franchisor to address those issues," Ms Booth said.
"All franchisors, including international chains in the Australian market, need to be aware that the Fair Work Ombudsman will continue to hold them to account if they turn a blind eye to compliance problems in their network. Franchisors must take action.
"The protection of vulnerable workers is also a priority for the FWO. Any workers with concerns about their pay or entitlements should contact us."
The Fair Work Ombudsman discovered the latest contraventions when it conducted proactive audits.
The affected workers - who were engaged in cashier, baker and kitchenhand positions - worked at the 85 Degrees franchisee outlets in Parramatta, Castle Hill, Hurstville, Campsie, Chatswood, Burwood, Eastwood and Chippendale.
The nine underpaid workers were underpaid minimum rates; overtime entitlements; penalty rates for weekend, public holiday and evening work; casual loadings; and a laundry allowance under the General Retail Industry Award 2010; and annual leave entitlements under the National Employment Standards, between 1 January and 31 December 2019.
One worker was also not paid on a weekly or fortnightly basis as required under the Award, and one worker was not paid a penalty rate payable when workers do not receive an adequate break between shifts.
Individual underpayments ranged from $239 to $15,198.
The individual franchisees back-paid the workers in full as a result of the FWO's proactive audit and the regulator has not taken court action against the franchisees.
Justice Robert Bromwich found that "85 Degrees does not, and could not, dispute the FWO's accurate assertion that the facts demonstrate a systematic failure to ensure compliance within its franchise network."
Justice Bromwich found that there had been "repeated contravening conduct by 85 Degrees itself and later in failing to take reasonable steps to prevent its franchisees doing more of the same", and further that 85 Degrees has now "abandoned its business in Australia and is unlikely to resume that business".
"85 Degrees did not ultimately find a way of achieving compliance by its franchisees, but rather gave up and has not really tried to do so at all," his Honour said.
Justice Bromwich found that general deterrence was of the utmost importance, saying the risk of future contraventions by similar participants in the same industry is high and there was a need to impose a penalty "to deter other would-be contraveners, and especially other franchisors".
His Honour noted that the exposé of systemic non-compliance by franchisees, particularly in the food retail industry and particularly affecting vulnerable workers on temporary visas, had been the background to the package of reforms that introduced franchisor liability.
"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," Justice Bromwich said.
"The clear legislative intention is to encourage compliance by making franchisors responsible for non-compliance as well [as] the employer franchisees. Slippage on all or any of the entitlement obligations and related record keeping obligations gives contravenors an immediate competitive advantage, and those who comply a competitive disadvantage, both ways extending to franchisors. Compliance virtue becomes a commercial vice, and compliance vice becomes a commercial virtue. Sufficiently severe sanctions are needed to prevent this from being the case."
Protecting vulnerable workers, including visa holders, is an enduring priority of the FWO. The FWO filed 138 litigations involving visa holder workers in the six financial years to June 2023.
