Penalty suspended due to reliance on franchisor's advice about pay

The Court's broad discretion regarding penalties for breaches of the Fair Work Act 2009 (Cth) which was on display in a recent case when it decided to effectively suspend penalties against directors provided they engaged in no further breaches in the next 3 years.‍

What happened?

‍The Fair Work Ombudsman ('Ombudsman') secured $57,800 in penalties against the former Chatime Bubble Tea franchisee in Sydney and its directors after finding that the company underpaid 17 of its workers through its use of flat rates. The Court found that Panol DC has contravened the Fair Work Act 2009 (Cth) by failing to pay employees minimum weekly wages, casual loading, public holiday entitlements and clothing allowances, as prescribed by the governing Fast Food Industry Award 2010.

The directors submitted that they had relied on advice given to them by the franchisor regarding pay rates and rostering and that, given their inexperience in the business, their reliance on the franchisor's guidance as was "reasonable". After much consideration, the court was satisfied that although the directors could not be excused, they "had a genuine belief that what they were doing was correct even though it seems clear that they were misled by [the franchisor] as to their responsibilities".

‍Suspended penalties

‍In an unusual move, Judge Cameron ordered that most of the penalties levelled against the directors personally be suspended (i.e. not payable) unless the directors were prosecuted for further non-compliance in the next 3 years. His Honour reasoned that the directors' "institution of a regime of underpayment of the employees was unintentional and arose from the directors uninformed reliance on Chatime's advice" labelling the directors as "victims too".

It was also relevant that both directors had apologised in writing to their staff, used their own funds to rectify the underpayments, had sold the business and were no longer in the retail space, meaning the likelihood of them repeating any unlawful behaviour was low.

‍Key Takeaways

• If a director or other person is involved in a company's breaches of its obligations to its employees as a result of the company relying on a franchisor's advice, they will not be excused by the Court, but it is possible to seek orders that penalties be suspended in exceptional circumstances.
• The discretion exercised in this case did not extend to the company, who was required to pay the full amount of the penalty ordered against it.
• Franchisees must seek independent specialist advice on their pay rates and rostering systems to ensure they are complying with their obligations as employers.
• Using flat rates can create a real risk of non-compliance, especially in businesses where staff work nights, weekends and on public holidays.

Pragma Lawyers can provide advice to you and your business to help minimise your risk. Contact us today by clicking here or call us (08) 6188 3340.

‍Case:Fair Work Ombudsman v Panol Dc Pty Ltd & Ors [2021] FCCA 373.