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The Fair Work Ombudsman broke new ground last week obtaining the first penalty against a master franchisor for being an accessory to the exploitative practises of one of its associated companies. The Federal Court found against the master franchisor following its involvement in the underpayment of four Korean workers employed by the Yogurberry chain.

The four workers were all employed in Yogurberry’s World Square Shopping Centre franchise in the Sydney CBD and were paid as little as $8 per hour; resulting in $17,287 in underpayments.

In considering the case, Justice Geoffrey Flick ruled that the master franchisor was an accessory to the exploitative practices of one of its associated companies. He found that the head Australian company and master franchisor of the chain, YBF Australia Pty Ltd, had been directly involved in establishing the rates of pay and other practices that were used in the store. Justice Flick imposed a total of $146,000 in penalties, with YBF Australia Pty Ltd and the group’s payroll company penalised $25,000 and $35,000 respectively.

This decision follows on from recent controversies which have seen some 7-Eleven franchises also come under investigation for systematically underpaying overseas workers. Since 2009, the Fair Work Ombudsman has brought eight matters involving 7-Eleven franchisees before the courts and recovered $625,000 for underpaid employees. While legal action against 7-Eleven franchisors continues, it was reported last week that the Fair Work Ombudsman is investigating the oil giant Caltex for alleged intimidation and systematic wage fraud.

For franchisors, or any other businesses at the top of the supply chain, there are steps that can be taken to minimise the risk of being held directly liable for penalties and damages owing as a result of breaches of workplace laws committed by employers located further down the chain. These include:

  1. Not entering into franchise or other agreements based solely on price;
  2. Monitoring compliance of franchisees or contractors with workplace laws, including the activities of entities further down the chain; and
  3. Monitoring the activities of associated entities throughout the operation of a contract to ensure compliance with workplace laws.

These cases are the latest in a long line of victories for the Fair Work Ombudsman. Last July we flagged the Ombudsman’s intention to use powers under the Fair Work Act to make individuals personally liable for the breaches of workplace laws committed by companies they work with or for. This February we also reported that the Fair Work Ombudsman was taking legal action against an accounting firm for its involvement in a client’s underpayment of workers.

In light of the increasing trend for the Fair Work Ombudsman and other regulators to target individuals as accessories to breaches of legislation, key risk management measures including asset protection measures, need to be undertaken for these individuals. For proactive advice to ensure compliance with workplace laws and appropriate asset protection, please contact Mellor Olsson’s Employment and Commercial Practices respectively.