Franchisor's liability for a franchisee's underpayment of wages and other staff entitlements

Franchising is a popular business model in Australia, allowing brand expansion without direct operational control of each outlet. However, franchisors can be held responsible for serious breaches of workplace laws committed by their franchisees. The Full Court of the Federal Court’s decision in Bakers Delight Holdings Ltd v Fair Work Ombudsman [2025] FCAFC 144 provides valuable insight into how liability is assessed and what steps franchisors must take to avoid being held accountable for wage underpayments and record-keeping failures.

Background

The Fair Work Ombudsman (FWO) brought civil proceedings against Make Dough Enterprises Pty Ltd, a franchisee operating three “Bakers Delight” stores in Tasmania, for widespread breaches of the Fair Work Act 2009 (Cth) (FWA). Make Dough was found to have:

• Underpaid employees across multiple categories of employment;

• Failed to meet its obligations under the relevant enterprise agreement;

• Breached minimum standards under the National Employment Standards (NES);

• Failed to provide payslips or maintain accurate employee records;

• Obstructed Fair Work Inspectors and failed to comply with notices to produce.

The franchisor, Bakers Delight Holdings Ltd (BDH), was also pursued for liability under s 558B of the FWA, which allows franchisors to be held responsible for workplace contraventions by their franchisees in certain circumstances.

Key Legal Issues Considered

 A central issue in this case was whether the FWO could rely on the reverse onus of proof in s 557C to establish a franchisee's contraventions, which is a necessary precondition for franchisor liability under s 558B. Section 557C provides that if an employer has not kept proper employment records or provided payslips, the employer bears the burden of disproving wage-related allegations.

BDH argued that s 557C should only apply to direct proceedings against the employer/franchisee—not indirectly against the franchisor. In contrast, the FWO contended that once the franchisee's liability is established (even via the reverse onus), it can be used as a foundation for franchisor liability under s 558B.

The Full Court agreed with the FWO, affirming that:

“An applicant such as the FWO can rely on s 557C against an employer, and if the contravention has been established by this process, it is capable of satisfying s 558B(1)(a).”

This is significant—it confirms that where a franchisee fails to keep proper records, a franchisor may be found liable without the need for the FWO to re-prove each underpayment allegation against the franchisor independently.

Legal Framework: s 558B – Franchisor Liability

Section 558B of the FWA allows a franchisor to be held liable where:

1. The franchisee has contravened a civil remedy provision (such as those relating to wages, leave entitlements, or record-keeping);

2. The franchisor is a “responsible franchisor entity”—usually meaning they have a significant degree of influence or control over the franchisee’s affairs;

3. The franchisor knew or could reasonably be expected to have known the contravention would occur (or was likely to occur); and

4. The franchisor did not take reasonable steps to prevent the contravention.

In this case, BDH denied liability and challenged the use of the reverse onus under s 557C, but the Court upheld the broader construction of the provision.

Lessons for Franchisors

The decision serves as a strong reminder that franchisors cannot adopt a "hands-off" approach to workplace compliance. Key takeaways include:

1. Record-Keeping Failures by Franchisees Create Risk for Franchisors

Where a franchisee fails to maintain proper records, a franchisor may be exposed to liability due to the operation of s 557C. The Court made clear that:

“The employer has the burden of disproving the allegation.”

If the franchisee does not (or cannot) discharge this burden—for example, due to liquidation or inaction—the franchisor may have no means of challenging the underpayment claims.

2. A Franchise Agreement Is Not a Shield

Even where a franchisor exercises limited day-to-day control, liability can still arise if the franchisor is deemed to have the capacity to influence the franchisee's compliance. Franchisors must not assume that an arms-length contractual arrangement is sufficient to avoid exposure under s 558B.

3. Reasonable Steps Must Be Proactive and Documented

To avoid liability, franchisors must show that they took “reasonable steps” to prevent the franchisee’s contraventions. The Court cited factors including:

• Whether the franchisor provided adequate training and guidance to franchisees;

• The franchisor’s systems for auditing compliance;

• Mechanisms for receiving and acting on employee complaints;

• Whether the franchise agreement encouraged or required compliance with workplace laws.

Franchisors should maintain clear records of training programs, compliance checks, and communications with franchisees regarding employment obligations.

Lessons for Franchisees

While this case focuses on franchisor liability, franchisees should not take comfort in thinking the attention is diverted. Franchisees remain the primary employer responsible for:

• Paying correct wages;

• Complying with modern awards or enterprise agreements;

• Keeping accurate records and issuing payslips;

• Cooperating with Fair Work Inspectors.

Make Dough's directors are also facing personal liability under s 550 of the FWA (accessorial liability), highlighting that individuals behind a company cannot hide behind the corporate veil if they are knowingly involved in breaches.

What Should Franchisors Do Now?

Franchisors operating in NSW and across Australia should act promptly to:

• Review franchise agreements to ensure compliance obligations are explicit;

• Implement robust audit procedures to monitor wage compliance across the franchise network;

• Provide training to franchisees and their managers on obligations under the FWA;

• Establish clear channels for employee complaints and respond swiftly to red flags;

• Document all steps taken to promote compliance—including internal policies, legal memos, and follow-up communications.