Wage Underpayment in the Fast-Food Service Industry: Penalties for Franchisees

Wage underpayment in the fast-food industry is in the limelight again, after a Federal Circuit Court recently imposed fines of up to $58,000 against a company and its directors (the Directors), who operated a Chatime franchise in Sydney’s CBD.

Acting upon advice received from the Franchisor, the Directors underpaid 17 employees by paying ‘age-based’ and unlawfully low flat rates between January and November in 2017. This resulted in severe underpayments of hourly rates, a failure to pay casual loadings, public holiday penalty rates, and special clothing allowances the that employees were entitled to under the Fast Food Industry Award 2010, resulting in numerous breaches of the Fair Work Act 2009 (Cth) (the FW Act). Additionally, the Directors were found to have breached record-keeping laws.

The severity of the underpayments was compounded by the vulnerability of the employees who were all 20 years or younger at the time of the contravention, and more than half were temporary visa holders. The Court found that due to their vulnerable status, all 17 employees most likely had an incomplete understanding of their rights under their relevant Award and Australian workplace laws. The Fair Work Ombudsman has previously labelled such acts as “particularly deplorable as it [has] undercut migrant workers, who can be vulnerable due to language and cultural barriers, or are reluctant to speak up”.

The company was required to pay a penalty of $41,600 and the Directors were personally issued penalties of $9600 and $6600 fines respectively. However, the penalties against the Directors personally were suspended for 3 years and may be cleared without required payment subject to the directors’ compliance with the FW Act.

In making this decision, Judge Cameron reasoned that although the Directors’ failures could not be wholly excused, the Directors’ “uninformed reliance on Chatime’s advice” resulted in the unintentional “institution of a regime of underpayment of the employees”.

Accordingly, Judge Cameron emphasised deterrence as a means of preventing wage underpayment, particularly in the fast-food services industry, and the “need to communicate to employers a ‘no-tolerance policy’ of underpayment and record-keeping contraventions, particularly as that industry [fast-food services] employs a vulnerable workforce of visa-holders” and young workers. This decision has generated a ripple effect of attention drawn to wage underpayment against vulnerable workers, particularly in the fast food industry.

Since the passage of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Vulnerable Workers Act), franchisor entities may now be held liable for a franchisee’s contravention of the FW Act, in circumstances where the responsible franchisor entity (or its officers) knew or could reasonably be expected to have known the franchisee’s contravention would occur. Since the passing of the Vulnerable Workers Act has overlapped with the contraventions by the two Directors in this case, it was decided that the two Directors, as opposed to the franchisor, would only be held liable for the underpayments. This case stands as a tell-tale warning for franchisors to ensure franchise agreements contain terms that enable termination of the franchise agreement if the franchisee, deliberately or unwittingly, breaches the FW Act. However, this case also warns of the ramifications of underpayment, particularly that experienced by vulnerable work, for employers and their senior management who may be held personally unaccountable.

If you have any questions please contact Nick Stevens, Luke Maroney or Daphne Klianis for advice.