Two recent inquiries – the Fair Work Ombudsman (FWO) inquiry into the 7-Eleven franchise network, and the Senate Committee Inquiry into the exploitation of temporary work visa holders – have placed franchisors and franchisees on notice about the serious consequences of non-compliance with workplace laws.

This is clearly borne out by the Federal Court’s November 2016 decision in Fair Work Ombudsman v Yogurberry World Square Pty Ltd (Yogurberry case).[1] In this case, Justice Flick ordered four respondents to pay penalties totalling $146,000 for their involvement in contraventions of the Fair Work Act 2009 (Cth) (FW Act).

The contraventions involved underpayment of workers and breaches of other provisions relating to minimum shifts, record-keeping and pay slips in respect of four employees at the World Square Yogurberry store in Sydney’s CBD.

THE YOGURBERRY GROUP

Each of the corporate respondents was part of a group of companies owned and operated by members of the same family. The relationship between the four respondents and the penalties that were imposed is summarised in the table below:

Click here to view table. 

THE FOCUS ON ACCESSORIAL LIABILITY

The decision in the Yogurberry case highlights the importance the FWO attaches to accessorial liability for breaches of workplace laws.

Indeed, the FWO’s annual report for 2015–2016 shows that the FWO sought orders against accessories in more than 90% of the cases it brought before the courts.

Whilst only the first respondent, Yogurberry World, was the employer of the employees to whom the breaches related, the Court found that the other three respondents were involved in the contraventions and were therefore liable as accessories.

With respect to each accessory, Justice Flick made the following findings:

1. YBF had knowledge of, and participated in:

  • establishing rates of pay;
  • paying wages;
  • fixing hours of work; and
  • dealing with employment-related matters in respect to the four employees.

2. CL Group was responsible for accounting, payroll, operational and logistical functions for Yogurberry stores in Australia and therefore had knowledge of, and participated in:

  • payroll functions;
  • determining hours of work; and
  • dealing with other workplace matters.

3. Ms Soon Ok Oh:

  • set the rates of pay of employees;
  • gave instructions to the manager of the World Square store; and
  • occasionally gave directions to the employees personally.

PURPOSE OF PENALTIES

Justice Flick noted that the three principal purposes of penalties for breach of workplace laws are to:

  • punish offenders;

  • deter potential offenders; and

  • rehabilitate existing offenders.

In the context of the Yogurberry case, the amount of the penalties to be imposed was influenced by two further factors:

  • the respondents’ deliberate failure to keep relevant records despite being put on notice by the FWO of the need and importance of doing so; and

  • the respondents’ refusal to co-operate with the FWO in relation to disclosure of information relating to their financial circumstances.

NOT JUST MONETARY PENALTIES

In addition to monetary penalties, YBF and CL Group were ordered to engage a third party with qualifications in accounting or workplace relations to undertake an audit of compliance with the FW Act and the Fast Food Award.

Further, YBF, CL Group, and Ms Soon Ok Oh were ordered to engage a third person with professional qualifications in workplace relations to provide training to the second to fourth respondents (and directors or company secretaries of the corporate entities) covering obligations on employers under the Award, the FW Act and the Fair Work Regulations.

The respondents were also ordered to pay the costs of the FWO.

Had they not already made good on the underpayments in question, Yogurberry World would also very likely have been ordered to pay compensation to the employees concerned.

HOW SHOULD FRANCHISORS RESPOND?

In our previous article concerning potential exposures of franchisors and franchisees under workplace laws (available here), we suggested that it would be unwise to assume that the conduct and employment arrangements of franchisees is not a matter of concern for franchisors.

This is clearly borne out by the decision in the Yogurberry case.

It is also important to bear in mind that both franchisors and franchisees can suffer very significant reputational damage in such situations – in addition to the costs associated with paying penalties, remedying the effect of breaches, and defending legal proceedings.

In terms of exposure to accessorial liability, franchisors should be aware that they are highly likely to be found liable as accessories to breaches of workplace laws by franchisees in situations where they are actively involved in activities such as:

  • the day-to-day operation of their franchisees’ businesses;

  • setting wages and conditions for employees of their franchisees;

  • performing payroll functions on behalf of their franchisees;

  • determining hours of work and leave entitlements; and

  • dealing with employment matters more broadly.

Franchisors still need to balance two considerations.

  1. On the one hand, the more involved they become in the workplace affairs of their franchisees, the greater the risk of accessorial liability.

  2. On the other hand, the lesson from the 7-Eleven episode is that enormous brand damage can be suffered by franchisors, even where they are not accessorially or otherwise liable.

STERN WARNING ON COOPERATING WITH THE FAIR WORK OMBUDSMAN

In determining the appropriate penalty to be imposed on each respondent in the Yogurberry case, Justice Flick was particularly critical of the fact that the respondents appeared simply to regard the possibility of being exposed to legal penalties as part of the “cost of doing business”.

His Honour also drew adverse inferences from the fact that the respondents had ignored warnings by the FWO, failed to keep and retain records and failed adequately to cooperate with the FWO in relation to the provision of financial information.

These factors strongly suggest that both franchisors and franchisees should take warnings and requests for information from the FWO extremely seriously.

They should also, however, ensure that they obtain appropriate legal advice when faced with such warnings or requests in order to ensure that in responding to them they do not prejudice their legal position.