Posted 06/03/2023 by Paula Pyburne
The Inquiry into 7-Eleven report by the Fair Work Ombudsman (FWO) and other similar reports revealed systematic underpayment of migrant workers and other unlawful employment practices by some franchisees. In response, the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (the Amending Act) made amendments to the Fair Work Act 2009 (FW Act) to make franchisors and holding companies responsible for underpayments by their franchisees or subsidiaries where they knew, or ought reasonably to have known of the contraventions, and failed to take reasonable steps to prevent them [sections 558A, 558B and 558C].
On 7 February 2023, the FWO instituted proceedings against 85 Degrees Coffee Australia Pty Ltd (85 Degrees) in the Federal Court of Australia in what will be the first test of these provisions.
First enforcement action
85 Degrees is not new to compliance and enforcement action by the FWO.
In July 2015 the FWO took enforcement action against 85 Degrees for underpaying overseas workers in Australia in relation to casual loading, weekend, evening and public holiday shifts at a collective total of $42,775 between January 2009 and October 2014. Individual underpayments ranged from $5,663 to $16,586. 85 Degrees also failed to keep appropriate records and issue pay slips. During that period, 85 Degrees operated a factory located at St Peters, New South Wales, which manufactured cake and bakery products for its retail stores. There were five retail stores across NSW selling cake and bakery products manufactured at the factory.
As a result of the identified contraventions of the FW Act, 85 Degrees was required to enter into a formal Enforceable Undertaking which required, along with rectifying the relevant underpayments, that:
- 85 Degrees commission workplace relations training for its managers and directors and
- engage an external accounting professional to conduct two audits of its workplace practices in 2016–Â17.
Second enforcement action
The second enforcement action arose from breaches of the FW Act by 85 Degrees in relation to eight Taiwanese students who were underpaid a total of $429,393 between July 2016 and June 2017. During that period, 85 Degrees employed students from the Taipei City University of Science Technology in Taiwan as 12-month internees. The student interns worked in 85 Degrees’ factories or retail stores receiving about $1,650 to $1,750 per month, being about 30% of their lawful entitlements. There were additional breaches of the FW Act relating to issuing pay slips, record‑keeping and providing Fair Work Information Statements.
Given the existence of, and the terms of, the enforceable undertaking of 2015, the FWO initiated civil penalty proceedings in respect of these breaches. Whilst 85 Degrees admitted the contraventions of the FW Act and took action to pay the outstanding entitlements to the eight employees, it was for the Court to decide on the quantum of the penalty to be paid by 85 Degrees. In Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd the Federal Court ordered 85 Degrees to pay the Commonwealth a pecuniary penalty $475,200. Justice Robert Bromwich found that the underpayments by 85 Degrees were deliberate, stating:
Its most senior management must have been aware, or at least plainly should have been aware, that Australian law applied to the employment here. The end result was undoubtedly exploitative, and the contravening conduct itself was plainly deliberate.
Current enforcement action
At the time of the third identified contravention, 85 Degrees was operating one factory, but no longer operated any retail stores. Instead, it is a franchisor for 14 retail outlets where the produced factory goods are sold under exclusive supply arrangements.
Between 1 January and 31 December 2019, nine workers were allegedly underpaid minimum rates, overtime entitlements, annual leave entitlements, penalty rates for weekend, public holiday and evening work for work undertaken at the 85°C Daily Café franchisee outlets in Parramatta, Castle Hill, Hurstville, Campsie, Chatswood, Burwood, Eastwood and Chippendale. Individual underpayments ranged from $239 to $15,198.
The alleged underpayments as well as pay slip and record-keeping breaches were discovered during audits conducted by the FWO. The individual franchisees subsequently repaid the workers in full. No court action has been taken against the franchisees. The FWO argues that 85 Degrees has been on notice for many years about compliance issues. Therefore, it should reasonably have known some of its franchisees would underpay their workers and breach record-keeping and pay slip requirements.
The Court action
In order to succeed in its action against 85 Degrees, the FWO will have to prove the following:
- an employer who is a franchisee entity has contravened a civil remedy provision and
- 85 Degrees as the responsible franchisor entity or one of its officers knew or could reasonably be expected to have known that the contravention by the franchisee entity would occur or
- at the time of the contravention by the franchisee entity, 85 Degrees or one of its officers knew or could reasonably be expected to have known that a contravention by the franchisee entity of the same or a similar character was likely to occur.
The FWO alleges that 85 Degrees, as the responsible franchisor entity, is liable as it was aware of its franchisees’ financial circumstances and of their limited English and awareness of workplace laws (both of which courts have held do not excuse breaches of the FW Act).
To successfully defend the action, 85 Degrees must prove that it took reasonable steps to prevent the contraventions by its franchisees [subsection 558B(3)]. In determining whether 85 Degrees took such steps the Court may have regard to all relevant matters [subsection 558B(4)] including:
- the size and resources of the franchise or body corporate
- the extent to which 85 Degrees had the ability to influence or control the contravening franchisee’s conduct
- any action 85 Degrees took that was directed towards ensuring that its franchisees had a reasonable knowledge and understanding of the requirements of the relevant provisions of the FW Act
- the nature of 85 Degrees’ arrangements for assessing its franchisees’ compliance with those laws
- arrangements made by 85 Degrees for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions of the FW Act and
- the extent to which those arrangements encourage or require the franchisees to comply with the FW Act and other workplace laws.
This is a civil action for which the standard of proof is ‘the balance of probabilities’. 85 Degrees, as the franchisor, faces penalties of up to $63,000 per contravention.