‘Systemic’ compliance failures result in $1.44m penalty for coffee franchisor

The Fair Work Ombudsman has secured its third-highest-ever penalty, against a coffee franchisor for its “systematic failure to ensure compliance” across its franchise network.

In what marks the first time that the Fair Work Ombudsman (FWO) has used the “responsibly franchisor entity” provisions of the Protecting Vulnerable Workers reforms – intended to hold a franchisor to account for the conduct of its franchisees – penalties have been secured against 85 Degrees Coffee Australia, which operated a number of 85 Degrees-branded outlets in both NSW and the ACT, and was also the head franchisor of several franchisee-operated outlets.

FWO’s action against the franchisor commenced following the discovery, during proactive audits, of underpayment of workers engaged in cashier, baker and kitchen hand positions in several Sydney franchisee outlets in 2019.

While 85 Degrees did not directly underpay the workers, FWO noted in a statement, it has been held legally liable under the responsible franchisor entity provisions for the underpayment contraventions and various record-keeping and pay slip contraventions, as 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”.

Workers, the ombudsman went on, 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, as well as annual leave entitlements under the National Employment Standards, between 1 January and 31 December 2019.

Individual underpayments for the workers ranged from $239 to $15,198, FWO said.

The individual franchisees back-paid the workers in full, the ombudsman added, and it has not taken court action against the franchisees.

In a decision handed down earlier this week (4 June), Justice Robert Bromwich found that “85 Degrees does not, and could not, dispute the FWO’s assertion that the facts demonstrate a systematic failure to ensure compliance within its franchise network”.

His Honour noted 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 that the franchisor 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,” Bromwich J said.

His Honour further found that general deterrence was of the utmost importance, highlighting the risk of future contraventions by similar participants in the same industry is high and that there was a need to impose a penalty “to deter other would-be contraveners, and especially other franchisors”.

“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,” Bromwich J said.

The penalties ultimately totalled $1.44 million against the franchisor and followed a penalty in 2022 of over $475,000 for exploiting young Taiwanese students in Sydney.

Speaking about the latest penalty against 85 Degrees, Fair Work Ombudsman Anna Booth said it underscores that franchisors that 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, will face serious consequences.

“85 Degrees’ conduct in this matter was completely unacceptable,” she said.

“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.

“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.”