A recent ruling from the Full Court of the Federal Court in Australia is another reminder to Franchisors they can be held liable when franchisees underpay their employees.
In Bakers Delight Holdings Ltd v Fair Work Ombudsman [2025] FCAFC 144, the Court confirmed franchisors can and will face liability for wage breaches uncovered within franchise networks.
The Fair Work Ombudsman (FWO) started legal action against Bakers Delight after discovering three Bakers Delight franchised businesses in Hobart had underpaid 142 employees; underpayments which were an eye watering $1.25 million in a period between 2017 and 2020.
The Franchised business owner was a husband-and-wife team, who later placed their company into liquidation and took no part in the proceedings. Given that the franchisee had essentially bowed out and accepted defeat, the FWO turned its sights on the franchisor, Bakers Delight Holdings Ltd (BDH). The FWO claimed the Franchisor was liable for $642,162 of the total underpayments.
I am sure the Franchisor was thinking, ‘we pay our staff correctly! Why is a franchisor liable when a franchisee underpays their staff? What has that got to do with us?’
Well, the regulator argued that the Franchisor had actually become aware the franchisee was underpaying staff, following an internal audit in early 2019 but the franchisor failed to take reasonable steps to stop further wage breaches.
The key takeaway here for franchisors, if you know or ought to have known that something dodgy is going down, you are on the hook!
When is a Franchisor liable for a franchisees breach of the Fair Work Act?
Section 558B of the Fair Work Act 2009 (Cth) sets out when franchisors can be found legally responsible for breaches of the Fair Work Act, including underpaying staff, by franchisees.
For those interested in what employment law legislation says, section 558B(1) of the above mentioned act states a Franchisor will be liable when:
- a franchisee contravenes a civil remedy provision of the Fair Work Act
- the franchisor is a “responsible franchisor entity” for that franchisee;
- the contravention occurred in the franchisee’s capacity as a franchisee entity; and
- either the franchisor (or one of its officers) knew or could reasonably be expected to have known that the breach would occur, or that similar was likely to occur (emphasis added).
So how does a Franchisor avoid being liable for franchisees breaching employment law?
A franchisor can avoid liability if it can prove it took “reasonable steps” to prevent the contravention (s 558B(3) of the Fair Work Act).
To make things even more problematic for Franchisors, on this occasion the FWO sought to rely on a reverse onus of proof under section 557C. This section, in short, states that where proper records were not kept by the Franchisor, the burden of proof shifts to the employer to disprove a claim, rather than on the claimant. Coupled with the extended liability provisions, this created a very difficult situation for the franchisor. As such, the Court proceedings were paused to allow the Franchisor the ability to appeal whether this approach was correct in the circumstances.
The Reverse Onus Argument
The tricky question in this case was whether the FWO could use the reverse onus of proof under section 557C of the Fair Work Act (a section that usually is applied to the employer) against the Franchisor, regarding the franchisee’s breaches of employment law.
The Franchisor argued that in light of the fact it was not the employer here and, rather, was dragged into this mess in its capacity as the franchisor only, the reverse burden argument (as a result of failing to keep proper records) did not apply. The franchisor’s argument was that the FWO shouldn’t be able to rely on the reversed burden of proof argument when building its case. The Full Court disagreed! Which adds an interesting spin to this particular decision, and highlights the importance of keeping proper records for all Franchisors.
The Court held that the reverse onus could apply when establishing the franchisee’s contravention (step 1 under s 558B), even in proceedings against the franchisor. The judges described franchisor liability as a form of accessorial liability, whereby the franchisor’s responsibility is derived from the franchisee’s wrongdoing. Accessorial Liability provisions allow anyone involved in a contravention of fair work laws to be held accountable.
This interpretation, the Court held, aligns with Parliament’s intention to hold franchisors accountable where they could have prevented breaches in their networks, and failed to keep, or supply, accurate pay and entitlement records. This derives from the intention that franchisors have power to supervise and influence franchisees and therefore share responsibility if they do not comply.
The reverse onus now applied to a Franchisor meant it was on the franchisor to disprove the Fair Work contravention of their franchisee. A task that was obviously not possible.
These liability provisions dealing with the reverse onus had not been used in a situation against a ‘responsible franchisor’ before. The previous case of Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576 dealt with the accessorial liability provisions, dealing with responsible franchisors, however, did not include the reverse onus provision under s 557C.
So what is the key takeaway from the Bakers Delight case for Franchisors in Australia?
There are two key takeaways from this case, the first one we already knew (and most Franchisors are already acutely aware of):
1. Franchisors are liable for a Franchisee’s breach of the Fair Work Act when they know or ought to have known that a breach was occurring.
The second takeaway is something Franchisors should now keep in mind when it comes to keeping records of audits, training and inspections:
2. Franchisors who do not keep proper records (when it comes to Franchisee employment audits) or ensure Franchisee’s keep proper records for their payroll, can be liable under section 557C. That is, the onus will shift on to the Franchisor to prove a Franchisee did not breach the Fair Work Act.
As a firm that predominately acts for Franchisors all over Australia, we will certainly be ensuring our Clients are aware, franchisors cannot take a ‘set and forget’ approach when it comes to ensuring workplace compliance within the franchise network.
The case is a reminder of what we already know, but the Fair Work Ombudsman clearly take very seriously; section 558B effectively imposes a positive obligation on Franchisors to take at least ‘reasonable steps’ to prevent Fair Work Act contraventions by Franchisees.
As a Franchisor, if your franchisees are not paying staff correctly, the FWO may come knocking on your door asking what you did to stop it, or ensure it was not happening.
As a Franchisor, unless you can prove you took reasonable steps to prevent franchisees from paying their staff incorrectly, you could be liable!
Further, when carrying out the necessary audits and checks, it is important, as part of those audits, to ensure Franchisees are keeping proper records, and as the Franchisor to keep proper records. That way, if you are dragged into a case such as this, you can avoid the reverse onus falling back on you, as Franchisor, to disprove the Franchisee’s wrongdoings.
Quick steps for Franchisors:
- Franchisors need to keep detailed records of reasonable steps taken to ensure compliance by Franchisees with the Fair Work Act;
- Franchisors cannot simply rely on the fact that they have instructed their lawyers to insert clauses in the Franchise Agreement to prove that they are ‘taking steps to ensure Franchisee compliance’. A Franchisor needs to prioritise regular compliance checks with Franchisees and implement systems and measures to ensure franchisees are behaving themselves and paying their staff correctly!
- A Franchisor needs to ensure Franchisees are keeping proper records – failing to do so can impact both the Franchisee and the Franchisor.
Contact IP Partnership Lawyers
IP Partnership Lawyers are a specialised franchise law practice, who can provide expert and personalised legal advice to Franchisors to minimise risk of falling into the same trap as Bakers Delight. That is, we are here to assist Franchisors grow successful and compliant franchise systems.
Franchisors are invited to contact our office if you require assistance with the following:
- Assessing whether existing policies, employment agreements and systems meet the franchisor’s obligations under section 558B of the Fair Work Act.
- Ensuring Franchise Agreements have clear compliance clauses that give the franchisor the right to monitor, audit and enforce Fair Work compliance by franchisees.
- Advice on employment legislative changes for franchisors, new case law, and enforcement trends.
- Amendments to Employment Agreements and policies adopted by Franchisees in the Franchise network.
A Franchisor client of IP Partnership Lawyers has a collaborative relationship with our team, which include lawyers and staff who have specialised in franchise law for over 15 years.
We are here to help Franchisors be the proactive franchisors that Fair Work Act expects you to be. Franchisors from all over Australia and New Zealand are welcome to contact IP Partnership Lawyers to speak with a franchise expert.
