In a landmark decision, the Full Federal Court has confirmed that franchisors can be held liable for underpayments made by their franchisees under the Fair Work Act 2009 (Cth). The case, Bakers Delight Holdings Ltd v Fair Work Ombudsman [2025] FCAFC 144, sheds new light on franchisors' responsibilities and the potential legal risks they face if their franchisees fail to comply with workplace laws.
This case has significant implications for all franchisors, particularly in the area of liability for underpayment claims and the reverse onus of proof that can be triggered in cases where employers fail to maintain proper employment records. Franchisors should take immediate steps to ensure they are protected from potential liability by strengthening compliance systems across their networks.
Case Overview
The Bakers Delight case centred on the issue of whether a franchisor could be held liable for the actions of its franchisee under the Fair Work Act, specifically in relation to underpayment claims. The Federal Court affirmed that a franchisor could be held responsible for the underpayments made by a franchisee if the franchisor has sufficient control or influence over the franchisee’s operations.
A key feature of the case was the application of reverse onus of proof under section 557C of the Fair Work Act 2009 (Cth). This provision places the burden of proof on the employer to disprove allegations of underpayment if the employer does not maintain accurate employment records.
The Court ruled that this reverse onus of proof extends to franchisors. In other words, if the franchisee fails to maintain proper records and is found to have underpaid employees, the franchisor could be required to prove that no underpayment occurred.
Key Takeaways for Franchisors
- Franchisee Underpayments Are Franchisor’s Responsibility
The Court’s decision underscores that franchisors are not immune from liability for underpayment claims, even when the actual underpayment occurs at the franchisee level. If the franchisor has significant influence or control over the franchisee’s operations, they may be held responsible for any contraventions of the Fair Work Act.
- The Reverse Onus of Proof Applies to Franchisors
The reverse onus of proof, which typically applies to employers that fail to maintain proper records, can also be imposed on franchisors. In this case, the franchisor could be required to disprove underpayment allegations, putting them in a difficult position if they do not have access to or control over the employment records of their franchisees.
- Franchisors Must Strengthen Compliance Systems
The ruling highlights the importance of having robust compliance mechanisms in place to ensure that franchisees are adhering to workplace laws. Franchisors should actively monitor and support franchisees to avoid any potential underpayment issues or other Fair Work Act contraventions.
- Increased Scrutiny of Franchisee Record-Keeping
Given the Court’s findings, franchisors should require franchisees to maintain accurate and up-to-date employee records. Additionally, franchisors should ensure that they have access to these records, when necessary, to help mitigate any potential liability.
What Franchisors Should Do Now
To mitigate the risk of legal exposure and potential penalties, franchisors should take the following steps:
- Review and Update Compliance Protocols
Franchisors should ensure that their compliance programs adequately address underpayment risks and include regular audits of franchisee operations and payroll practices.
- Conduct Franchisee Training on Employment Obligations
Offering regular training sessions for franchisees on their responsibilities under the Fair Work Act can help prevent contraventions and improve overall compliance.
- Establish Clear Reporting and Monitoring Mechanisms
Create processes for ongoing monitoring and reporting of franchisee compliance with employment laws. This should include routine checks on payroll records and working conditions to ensure that franchisees are meeting their obligations.
- Consult Legal Experts for Risk Mitigation
Franchisors should consult with legal professionals to review their current franchise agreements and operational practices, ensuring that adequate safeguards are in place to limit potential liability.
Conclusion
The Bakers Delight case serves as a stark reminder to franchisors about the potential for liability arising from franchisee underpayment claims. The Court’s decision to apply the reverse onus of proof to franchisors, alongside the need for active oversight and control, highlights the importance of compliance and due diligence within franchise networks.
Franchisors should act now to review their compliance frameworks and take steps to safeguard against the risks posed by potential underpayment claims. By ensuring franchisees maintain proper records and comply with the Fair Work Act, franchisors can reduce their exposure to legal and financial consequences.
For more detailed advice on how this case impacts your franchise business, or to discuss compliance strategies, please contact our team at Pennisi Zia Lawyers.