Federal Court of Australia

Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2024] FCA 576

ORDERS

In the declarations and orders below, the following definitions apply:

Award means General Retail Industry Award 2010;

Fair Work Act means the Fair Work Act 2009 (Cth);

Fair Work Regulations means the Fair Work Regulations 2009 (Cth);

Franchisee Entities means:

(a)    Bright Sunny Pty Ltd (ACN 166 845 343);

(b)    CPJ Group Pty Ltd (ACN 614 405 195);

(c)    Crowd Group Go Pty Ltd (ACN 605 288 355)

(d)    T.G.L Cake Pty Ltd (ACN 623 350 765);

(e)    Xin Man Trading Pty Ltd (ACN 609 351 199); and

(f)    Yi Xuan Pty Ltd (ACN 613 751 358),

SOAF means the statement of facts agreed between the applicant and the respondent dated 27 November 2023.

References to annexures and tables are references to those annexures and tables contained in the SOAF.

THE COURT DECLARES THAT:

1.    The respondent contravened section 558B(1) of the Fair Work Act in respect of each of the contraventions of a civil remedy provision set out at paragraph (d), items i to xvii, below, in circumstances where:

(a)    one or more of the Franchisee Entities committed each of the contraventions of a civil remedy provision set out at paragraph (d), in items i to xvii, below;

(b)    the respondent was a responsible franchisor entity of each of the Franchisee Entities;

(c)    each contravention set out at paragraph (d), items i to xvii, below occurred in the Franchisee Entity’s capacity as a franchisee entity of the respondent;

(d)    the respondent could reasonably be expected to have known that each contravention set out in this paragraph, items (i) to (xvii) below, would occur:

(i)    each of the Franchisee Entities listed in column A of Annexure A contravened section 535(1) of the Fair Work Act in relation to each of their respective employees listed in column B, by failing to make and keep for seven years, each of the employee records of the kind required by one or more of the following regulations of the Fair Work Regulations as set out in column C, during each of the periods set out in column D:

A.    a record that specified the employer’s name, the employee’s name, the employment status of the employee, the date employment began and the employer’s Australian Business Number, as prescribed by regulations 3.32(a), 3.32(b), 3.32(d), 3.32(e) and 3.32(f) of the Fair Work Regulations;

B.    a record that specified the rate of remuneration, gross and net amounts paid, casual hours worked, and loadings and penalty rates when the relevant employee was entitled to be paid loadings or penalty rates, as prescribed by regulations 3.33(1)(a), 3.33(1)(b), 3.33(2), 3.33(3)(c) and 3.33(3)(d) of the Fair Work Regulations;

C.    a record that specified overtime hours worked, or when an employee started and ceased working overtime hours, as prescribed by regulation 3.34 of the Fair Work Regulations;

D.    a record relating to personal leave, as prescribed by regulation 3.36(1) of the Fair Work Regulations; and

E.    a record of termination of employment, as prescribed by regulation 3.40 of the Fair Work Regulations;

(ii)    each of the Franchisee Entities listed in column A of Annexure B to the SOAF contravened section 536(1) of the Fair Work Act by failing to give pay slips to each of their respective employees listed in column B, during the period set out in column C;

(iii)    WLH Pty Ltd contravened section 535(4) of the Fair Work Act by making and keeping records, for the purposes of section 535 of the Fair Work Act, that it knew was false or misleading, in respect of Jie Lu during the period from 21 January 2019 to 8 March 2019;

(iv)    each of the Franchisee Entities listed in column A of Annexure C, Table 1 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, the minimum rate as required by clause 17 of the Award, during the period set out in column D;

(v)    each of the Franchisee Entities listed in column A of Annexure C, Table 2 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, a casual loading for all hours worked on a Monday to Friday to which they were entitled pursuant to clause 13.2 of the Award, during the period set out in column D;

(vi)    each of the Franchisee Entities listed in column A of Annexure C, Table 3 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, casual penalty rates for hours worked on a Saturday to which they were entitled pursuant to clause 29.4(d)(i) of the Award, during the period set out in column D;

(vii)    CPJ Group Pty Ltd contravened section 45 of the Fair Work Act by failing to pay to Freya Chen, full-time penalty rates for hours worked on a Saturday to which she was entitled pursuant to clause 29.4(c) of the Award, during the period from 4 March 2019 to 27 June 2019, as set out in Annexure C, Table 4;

(viii)    each of the Franchisee Entities listed in column A of Annexure C, Table 5 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, penalty rates for hours worked on a Sunday to which they were entitled pursuant to clause 29.4(e)(ii) of the Award, during the period set out in column D;

(ix)    each of the Franchisee Entities listed in column A of Annexure C, Table 6 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, penalty rates for hours worked on a public holiday to which they were entitled pursuant to clause 29.4(f)(i) of the Award, during the period set out in column D;

(x)    CPJ Group Pty Ltd contravened section 45 of the Fair Work Act by failing to pay to Starla Liang, evening penalty rates for hours worked on a Monday to Friday after 6.00 pm to which she was entitled pursuant to clause 29.4(b)(i) of the Award, during the period from 11 January 2019 to 17 May 2019, as set out in Annexure C, Table 7;

(xi)    each of the Franchisee Entities listed in column A of Annexure C, Table 8 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, overtime rates for overtime hours worked on a Monday to Saturday to which they were entitled pursuant to clause 29.2(a) and (c) of the Award, during the period set out in column D;

(xii)    each of the Franchisee Entities listed in column A of Annexure C, Table 9 contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B, overtime rates for overtime hours worked on a Sunday to which they were entitled pursuant to clause 29.2(d) and (e) of the Award, during the period set out in column D;

(xiii)    CPJ Group Pty Ltd contravened section 45 of the Fair Work Act by failing to pay to Freya Chen overtime rates for overtime hours worked on a public holiday to which she was entitled pursuant to clause 29.4(2)(d) of the Award, during the period from 4 March 2019 to 27 June 2019, as set out in Annexure C, Table 10;

(xiv)    CPJ Group Pty Ltd contravened section 45 of the Fair Work Act by failing to pay to Starla Liang rates for hours worked where she did not have a 12-hour rest period between the completion of work on one day and the commencement of work on the next day, to which she was entitled pursuant to clause 31.2 of the Award, during the period from 11 January 2019 to 17 May 2019, as set out in Annexure C, Table 11;

(xv)    CPJ Group Pty Ltd contravened section 45 of the Fair Work Act by failing to pay to each of their respective employees listed in column B of Annexure C, Table 12, a laundry allowance to which they were entitled pursuant to clause 20.2(b)(iii) of the Award, during the period set out in column D;

(xvi)    CPJ Group Pty Ltd contravened section 44(1) of the Fair Work Act by failing to pay to Freya Chen upon the termination of her employment, for a period of untaken paid annual leave upon her employment ending, the amount that would have been payable to her had she taken that period of leave, to which she was entitled pursuant to section 90(2) of the Fair Work Act, as set out in Annexure C, Table 13;

(xvii)    TGL Cake Pty Ltd contravened section 45 of the Fair Work Act by failing to pay Fang Lin on a weekly or fortnightly basis as required by clause 23.1 of the Award, during the period from 1 June 2019 to 13 December 2019; and

(e)    the respondent could reasonably be expected to have known and (from 1 April 2019) knew that contraventions by the Franchisee Entities of the same or a similar character to those set out at paragraph (d), items i to xvii, above were likely to occur.

THE COURT ORDERS THAT:

2.    The respondent pay penalties pursuant to section 546 of the Fair Work Act in the sum of $1,440,000 to the Commonwealth within 60 days of the making of these orders, being by or before 3 August 2024, or such later date as may be ordered by the Court, the individual amounts making up that sum being set out in the Schedule to the reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BROMWICH J:

Introduction

1    These are reasons for the making of declarations and for the imposition of penalties arising out of contraventions of a civil penalty provision of the Fair Work Act 2009 (Cth) admitted to by the respondent, 85 Degrees Coffee Australia Pty Ltd, in its capacity as a franchisor made responsible for the contravening conduct of eight of its franchisees by s 558B of that Act, defined as a “responsible franchisor”. References to franchisees in these reasons are to those eight franchisees unless the context indicates otherwise.

2    The applicant is the Fair Work Ombudsman (FWO). The contraventions by the franchisees entailed underpayment of employee award entitlements and related recording keeping deficiencies. Declarations for contravention have been agreed upon in terms that are in substance acceptable to the Court. It is common ground that substantial civil penalties are appropriate. The dispute for adjudication concerns quantum. Nearly all of the facts necessary for the determination of that dispute are contained in a statement of agreed facts (SOAF).

3    The contraventions took place over the course of the 2019 calendar year. They involved the franchisees between them underpaying employees’ entitlements under the General Retail Industry Award 2010 (Retail Award) and the Fair Work Act in relation to minimum wages, casual employment loading, penalty rates (weekends, public holidays and evenings), overtime (weekdays, weekends and public holidays), breaks between shifts allowance, laundry allowance, and annual leave on termination, and related failures to keep employment records, pay on a weekly or fortnightly basis and provide payslips as required. It is convenient to refer to these contraventions presently before the Court collectively as the 2019 responsible franchisor contraventions.

4    Section 558B(1), set out at [15] below, imposes liability on a responsible franchisor entity for contraventions of civil remedy provisions under the Fair Work Act by its franchisees, but only where the franchisor or one of its officers knew, or could reasonably be expected to have known, that the contraventions by its franchisee would occur (s 558B(1)(d)(i)), or contraventions of the same or a similar character were likely to occur (s 558B(1)(d)(ii)).

5    85 Degrees admits that it could reasonably be expected to have known that the 2019 responsible franchisor contraventions would occur and that contraventions of the same or a similar character were likely to occur. 85 Degrees further admits that from 1 April 2019, it actually knew that contraventions of the same or a similar character were likely to occur because of correspondence from the FWO setting out preliminary conclusions to that effect sent and received on that date. 85 Degrees also admits that, despite that actual knowledge, acquired roughly a quarter of the way through the contravening period, it did not take reasonable steps to prevent those contraventions from occurring. 85 Degrees does not, and could not, dispute the FWO’s accurate assertion that the facts demonstrate a systematic failure to ensure compliance within its franchise network.

6    In 2020, a prior proceeding was commenced by the FWO against 85 Degrees involving similar contraventions by 85 Degrees, but in its capacity as the employer of the affected employees. Those contraventions took place in the 12-month period between 1 July 2016 to 26 June 2017, and may therefore conveniently be referred to as the 2016–2017 employer contraventions. Those contraventions were the subject of a previous proceeding commenced by the FWO against 85 Degrees, culminating in a total civil penalty of $475,200 being imposed under s 546(1) of the Fair Work Act: Fair Work Ombudsman v 85 Degrees Coffee Australia Pty Ltd [2022] FCA 1317 (85 Degrees No 1). These reasons should be read in conjunction with those in 85 Degrees No 1.

7    There was an 18-month gap between the 2016–2017 employer contraventions and the 2019 responsible franchisor contraventions. The proceeding for the 2016–2017 employer contraventions commenced after the 2019 responsible franchisor contraventions took place, but took place at a time when 85 Degrees must have been fully aware of the existence of the FWO investigation. The FWO commenced an audit into 85 Degrees franchisees in early 2019, which uncovered the present contraventions.

8    FWO inspectors conducted site visits at 85 Degrees stores on 18 February 2019, and issued notices to produce records or documents to franchisee entities in the days following. 85 Degrees admits it became aware of the investigation at the time or soon thereafter.

9    Both sets of contraventions took place after an enforceable undertaking had been given by 85 Degrees to the Commonwealth of Australia (represented by the FWO) under s 715 of the Fair Work Act, proffered on 30 April 2015 and accepted by the FWO on 5 June 2015, a little over a year before the 2016–2017 employer contraventions commenced in July 2016. The enforceable undertaking admitted to various contraventions taking place between 3 January 2009 and 25 October 2014, including contraventions of payment and record keeping obligations of the Fair Work Act, Retail Award and Food, Beverage and Tobacco Manufacturing Award 2010 (Food Award) in relation to its employees at a factory and retail store. This is a further factor demonstrating that it knew, or should have known of, its own obligations when it was the employer, and similarly knew, or should have known of its franchisees’ obligations.

10    The proscriptions for both sets of contraventions in 2016–2017 and 2019 are directed to the same objective of sanctioning and thereby deterring the underpayment of employee entitlements and failure to keep required employee records. As noted above, the 2016–2017 contraventions involved 85 Degrees failing to pay entitlements of its own employees. The present 2019 contraventions involve franchisees of 85 Degrees failing to pay their employees, in circumstances in which 85 Degrees is also made legally responsible for this occurring, provided it knew or should have known that the contraventions would occur, or contraventions of a similar character were likely to occur: see s 558B(1)(d). 85 Degrees has admitted that this was so, and admits all the contraventions alleged by the FWO.

11    The major point of distinction between this case and 85 Degrees No 1, apart from prior direct liability of 85 Degrees as an employer, and later extended liability as a responsible franchisor for franchisee contraventions, is that the overall underpayments this time are much less, totalling $32,321.19, whereas previous they totalled $429,393.18. The present underpayments have all been rectified by the franchisees. As noted above, the 85 Degrees No 1 proceedings commenced after the present contraventions had taken place, but when 85 Degrees must have been aware of them having occurred.

The penalties sought

12    The competing written submissions include schedules that set out what each side contends to be appropriate penalties. Those schedules were combined by my chambers into a shorter single schedule, in which the parties updated their stance and final position soon after the penalty hearing. A form of that document, now also including the penalties this Court has decided to impose, is in a schedule to these reasons.

13    The FWO seeks an overall penalty of $1,604,610 after a 10% discount for cooperation by way of admissions. 85 Degrees primarily seeks a substantially lesser overall penalty of $670,320 applying the higher discount for cooperation of 20%, and in the alternative an overall penalty of $1,345,680 if its submissions as to the application of s 557(1), which requires contraventions of the Fair Work Act to be treated a single contravention in certain circumstances, are not accepted, and those advanced by the FWO are applied instead.

14    The lesser figure proposed by 85 Degrees, in addition to applying the higher 20% discount for cooperation, is arrived at by:

(a)    for some contraventions, applying a lower percentage of the maximum penalty; and

(b)    disputing aspects of the FWO’s application of statutory course of conduct grouping under s 557 of the Fair Work Act.

15    The greater figure proposed by 85 Degrees is arrived at upon the basis of its argument as to s 557 not being accepted, but still applying (a) and (b) of the preceding paragraph.

The regime imposing liability upon franchisors for franchisee contravening conduct under the Fair Work Act

16    Sections 558BA and 558B were inserted into the Fair Work Act by the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth), commencing operation on 15 September 2017. Section 558B(1), which has not been amended since its commencement, provides:

558B    Responsibility of responsible franchisor entities and holding companies for certain contraventions

Responsible franchisor entities

(1)    A person contravenes this subsection if:

(a)    an employer who is a franchisee entity of a franchise contravenes a civil remedy provision referred to in subsection (7); and

(b)    the person is a responsible franchisor entity for the franchisee entity; and

(c)    the contravention by the franchisee entity occurs in the franchisee entity’s capacity as a franchisee entity; and

(d)    either:

(i)    the responsible franchisor entity or an officer (within the meaning of the Corporations Act 2001) of the responsible franchisor entity knew or could reasonably be expected to have known that the contravention by the franchisee entity would occur; or

(ii)    at the time of the contravention by the franchisee entity, the responsible franchisor entity or an officer (within the meaning of the Corporations Act 2001) of the responsible franchisor entity knew or could reasonably be expected to have known that a contravention by the franchisee entity of the same or a similar character was likely to occur.

17    Section 558B(2) extends the same liability to holding companies of franchisors on substantially the same basis.

18    Section 558B(3) provides for a defence of taking reasonable steps to prevent contraventions by franchisees or a subsidiary of the same or a similar character, with a shopping list set out in subsection (4) of matters that may be taken into account, and subsection (5) making it clear that list is not exhaustive. It is not necessary to detail that defence further, as 85 Degrees does not contend that it took any such reasonable steps, even in the period from 1 April 2019 to the end of the contravening period near the end of 2019 when it had actual knowledge of what was taking place.

19    Section 558A defines the terms “franchisee entity” and “responsible franchisor” entity for the purposes of s 558B:

558A Meaning of franchisee entity and responsible franchisor entity

(1)    A person is a franchisee entity of a franchise if:

(a)    the person is a franchisee (including a subfranchisee) in relation to the franchise; and

(b)    the business conducted by the person under the franchise is substantially or materially associated with intellectual property relating to the franchise.

(2)    A person is a responsible franchisor entity for a franchisee entity of a franchise if:

(a)    the person is a franchisor (including a subfranchisor) in relation to the franchise; and

(b)    the person has a significant degree of influence or control over the franchisee entity’s affairs.

The contravening conduct and its background

85 Degrees’ compliance history

20    The following short narrative of 85 Degrees’ compliance history as agreed by way of the SOAF (repeating in part facts described above), drawing on the unchallenged summary provided in an annexure to the FWO’s written submissions:

(a)    in November 2014, the FWO commenced an investigation into 85 Degrees in relation to possible contraventions of the Retail Award and the Fair Work Act. The investigation uncovered that, between 3 January 2009 and 25 October 2014, 85 Degrees committed various contraventions of the Fair Work Act, the Retail Award and the Food Award in relation to four employees who worked at a factory and a retail store (first investigation contraventions);

(b)    on 24 March 2015, the FWO informed Mr Shu-Ming (Timothy) Hsu, 85 Degrees’ managing director, of its findings. As a consequence of that investigation, 85 Degrees entered into an enforceable undertaking under s 715(2) of the Fair Work Act on 5 June 2015 in which it admitted the first investigation contraventions;

(c)    in or around 2015, 85 Degrees began transferring its business to a franchise model, executing agreements with various franchisees;

(d)    in 2016 and 2017, independent enforcement undertaking audits were conducted by National Retail Association Legal Limited (NRA Legal), who had been engaged by 85 Degrees for that purpose, identifying continuing breaches or risks of breaches of the Fair Work Act and the Retail Award. NRA Legal reported its findings to affected employees. Mr Hsu was aware that the audits had identified significant underpayments by at least 10 October 2016;

(e)    from 1 July 2016 to 26 June 2017, 85 Degrees committed the 2016-17 employer contraventions;

(f)    from 9 January 2019, the 2019 responsible franchisor contraventions occurred;

(g)    in early 2019, the FWO also commenced a pro-active audit of 85 Degrees franchisee entities. It reported its preliminary findings, which identified a number of contraventions, to 85 Degrees on 1 April 2019; and

(h)    on 3 December 2020, the FWO commenced proceedings in this Court in relation to the Second Contraventions. I delivered judgment in that proceeding (85 Degrees No 1) on 4 November 2022, and made a further declaration that 85 Degrees had contravened a clause of the enforceable undertaking referred to in (b) on 2 December 2022.

The nature of the franchise arrangements

21    The operation of the franchises was tightly controlled by 85 Degrees. Under the contractual arrangements with franchisees, it had the ready means of ascertaining what was happening and taking reasonable steps to prevent the contraventions from occurring. If that had been done, it would have made available a defence to that effect provided by s 558B(7). Its failure to do so means that defence was not able to be relied upon. Because a “responsible franchisor" must have “a significant degree of influence or control over the franchisee entity’s affairs” (s 558A(2)(b)), section 558B will more easily apply to such arrangements.

22    The features of the franchise arrangements that found, in a practical way, 85 Degrees’ admission to be a responsible franchisor may be summarised as follows:

(a)    85 Degrees required operation of franchises in accordance with the 85 Degrees “System”, being a method of promoting and selling 85 Degrees products in their stores;

(b)    to ensure compliance with the System, 85 Degrees created, and required compliance with, a detailed operations manual, specifying, among other things, minimum performance standards for franchisees and procedures for how stores were to be managed;

(c)    85 Degrees required and provided training to franchisees’ store managers and other staff;

(d)    franchisees were required to sell products they purchased from 85 Degrees, which it manufactured at its central kitchen, at prices specified by 85 Degrees;

(e)    franchisees were required to use equipment, and point of sale and security systems, as stipulated by 85 Degrees; and

(f)    85 Degrees had a right to inspect and audit the franchisees’ records, and a right to conduct “mystery customer” checks on franchisee locations.

23    In addition to its control under the contractual arrangements, 85 Degrees leased store locations to three of its franchisees. 85 Degrees had an unusual level of familiarity with the detail of the operations of its franchisees, as it had previously directly operated the 85 Degrees retail business, including two of the store locations later transferred to franchisees. The 85 Degrees “System” used by franchisees was based on the way in which 85 Degrees had directly operated its stores prior to the transfer to the franchise model.

24    The nature of the franchise arrangements, and the prior history of contraventions, explains why 85 Degrees could never realistically have established the defence in s 558B(3) set out above. It was always likely that it would be liable for contraventions by its franchisees that were able to be proven by the FWO, including in particular as to the states of mind set out in s 558B(1)(d).

The contravening conduct

25    As the chronology above indicates, until in or around 2015, 85 Degrees operated its stores directly, and was the direct employer of staff who worked there. From about that time, it began to shift its business operations to a franchise model. This resulted in those stores coming to be operated by franchisees, including the eight franchisees whose contraventions are the subject of this proceeding. However, as detailed above, 85 Degrees retained a large measure of legal and practical control over the franchisees.

26    The admitted contraventions, which may be shortly stated for present purposes, comprise of breaches of the following provisions of the Fair Work Act, each of which is a civil remedy provision referred to in s 558B(7):

(a)    s 44(1), by reason of one franchisee failing to pay an employee’s annual leave entitlements on termination of employment in accordance with s 90(2), which forms part of the National Employment Standards (NES);

(b)    s 45, by reason of franchisees contravening the Retail Award including by failing to pay minimum rates of pay, casual loading, weekend, public holiday and evening penalty rates, overtime, penalty rates for short breaks between shifts and a laundry allowance, and failing to pay employees at the correct frequency;

(c)    s 535(1) by reason of franchisees failing to make and keep records of various kinds required by the Fair Work Regulations 2009 (Cth), comprising records of:

(A)    the employer’s name and ABN, and the employees’ names, status and start dates;

(B)    the employees’ remuneration rates and the amounts actually paid to them;

(C)    the employees’ base rates of pay, loadings and penalty rates;

(D)    the hours worked by casual employees;

(E)    the penalty rates employees were entitled to be paid;

(F)    the overtime hours worked by the employees;

(G)    the personal leave taken and leave balances of the employees; and

(H)    the termination of the employees’ employment.

(d)    s 535(4), by reason of one franchisee knowingly making and keeping timesheets for an employee that recorded a false or misleading rate of remuneration;

(e)    s 536(1), by reason of the franchisees failing to give employees pay slips within one working day of paying an amount to them in relation to the performance of work.

27    The underpayments that resulted from the contraventions under ss 44(1) and 45, listed at [26](a) and (b) above, resulted in an underpayment of franchise employees of a total of $32,321.19.

28    The evidence relied upon by the FWO to establish the knowledge element in s 558B(1), as admitted by 85 Degrees, is set out in some detail in the SOAF, based principally on the knowledge of its managing director, Mr Shu-Ming (Timothy) Hsu, at the relevant times. A summary of that undisputed evidence helps to inform the need for deterrence, especially general deterrence given that I accept elsewhere in these reasons that 85 Degrees has abandoned its business in Australia and is unlikely to resume that business. This includes the following key facts:

(a)    Prior to the 2019 responsible franchisor contraventions and the 2016-2017 employer contraventions, 85 Degrees had admitted to contraventions of the same or a similar kind (i.e. the first investigation contraventions). It entered into an enforceable undertaking on the basis of those admitted contraventions which included undertaking to ensure future compliance at all times and in all respects with the Fair Work Act, Fair Work Regulations 2009 (Cth) and Retail Award and to implement systems and processes to ensure this. If 85 Degrees transferred its business, it undertook to inform the FWO of the transfer and furnish the transferee with a copy of the undertaking. Mr Hsu was one of the signatories to that enforceable undertaking.

(b)    Audits were conducted pursuant to the enforceable undertaking on six occasions in 2016 and 2017. Each of those audits identified continuing breaches of the Fair Work Act and Retail Award in relation to the 85 Degrees stores. This included failures to pay minimum wage rates, penalty rates and overtime and failures to keep records and issue pay slips in accordance with the Fair Work Act and Fair Work Regulations, which Mr Hsu, and therefore 85 Degrees, knew about.

(c)    The franchise model implemented by 85 Degrees was based on these non-compliant business operations, which Mr Hsu, and therefore 85 Degrees, knew about.

(d)    Based on the enforceable undertaking and the audits, Mr Hsu (and therefore 85 Degrees) could also reasonably be expected to have known that the operations of at least two specific stores were not compliant with the Fair Work Act when they were transferred to the corresponding franchisees.

(e)    The franchisees were, to the knowledge of Mr Hsu and other 85 Degrees representatives, owned and operated by individuals who spoke limited English, had limited or no experience in operating a retail business in Australia or knowledge of Australian workplace laws, and had not obtained business or accounting advice before entering into their respective franchise agreements.

(f)    85 Degrees’ representatives conducted site visits and monitored franchisee sales data, profit and loss statements and stock levels, and otherwise had the power to conduct wide-ranging audits and inspections of franchisee operations, including employee pay records.

(g)    Despite its knowledge of the prior contraventions, and the power to do something about them both corrective in relation to what had already occurred, and preventative as to future compliance, 85 Degrees did not provide any information or training to franchisees about their obligations in relation to their employees including under the Fair Work Act and Retail Award.

(h)    85 Degrees became aware that the FWO was investigating the franchisees’ compliance with the Fair Work Act in February 2019, and the FWO had specifically informed 85 Degrees and its representatives, including Mr Hsu, of identified contraventions corresponding with many of the franchisee contraventions by 1 April 2019, but those contraventions continued.

(i)    85 Degrees took only limited, insufficient steps to address non-compliance by franchisees:

(A)    On 21 February 2019, after 85 Degrees became aware of the FWO audit of franchisees, its lawyers sent a letter to franchisees which expressed that it was important that they comply with their obligations under the Fair Work Act and industry awards (including two awards not applicable to their businesses), but provided nothing further as to the nature of these obligations.

(B)    On 13 September 2019, almost six months after 85 Degrees acquired actual knowledge of contraventions, 85 Degrees’ lawyers sent a letter to franchisees containing links to FWO and National Retail Association materials to assist compliance. Although this was closer to “reasonable steps” that 85 Degrees might take to address the contraventions, for reasons that are not clear, the letter was not sent to one franchisee – TGL Cake Pty Ltd – which continued contravening.

(j)    On the basis of the above, 85 Degrees admits that it had constructive knowledge that the contraventions by its franchisees would occur, as well as constructive knowledge and (from 1 April 2019) actual knowledge that contraventions of the same or a similar character were likely to occur. 85 Degrees admits it did not take reasonable steps to prevent the contraventions by the franchisees or contraventions of the same or a similar character. In particular, while 85 Degrees told the FWO during the investigation that it was working to develop an “action plan” and training materials for franchisees, it did not communicate those to any of the franchisees before 13 September 2019. Its communications on that date omitted one franchisee which was continuing to engage in the contraventions.

29    I am amply satisfied that 85 Degrees’ admitted contraventions of s 558B(1) are also supported by the agreed facts set out in the SOAF. I consider that 85 Degrees’ admissions were a prudent step for it to take, as this was the inevitable outcome had this proceeding gone to trial. The benefit has been to the process rather than the outcome, in terms of saving court time and resources, and the resources of the regulator able to be deployed in other compliance and investigation activities. It is relevant to deterrence, both specific and general.

Consideration of deterrence

Civil penalty principles

30    The principles in relation to civil penalty imposition are well-known. I recently concisely summarised them in Fair Work Ombudsman v Commonwealth Bank of Australia [2024] FCA 81 (FWO v CBA), including by reference to Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; 274 CLR 450. It is convenient to repeat that summary:

[36]    … The primary, if not sole, purpose of a civil penalty is deterrence: Pattinson at [9] (Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ). The Court is to identify the “appropriate” penalty necessary to deter future contraventions “of a like kind” by the contravener and others to achieve specific and general deterrence: Pattinson at [9]-[10]. This will require regard to be taken of the conduct giving rise to the contravention, the circumstances of the contravener, and factors indicating the risk of future contraventions: Pattinson at [58]-[60].

[37]    Following Pattinson at [10] and [38]-[42], the power to impose a civil penalty in s 546 of the FWA is “not subject to constraints drawn from the criminal law and there is no place for a ‘notion of proportionality’ ” of the kind identified for the purposes of criminal proceedings in Veen v The Queen [No 2] (1988) 164 CLR 465, namely a relationship between the seriousness of the conduct and the penalty imposed. Rather, what is required is that there be “some reasonable relationship between the theoretical maximum and the final penalty imposed”: Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25 at [156], quoted in Pattinson at [53]. That relationship is established where “the maximum penalty does not exceed what is reasonably necessary to achieve the purpose of s 546: the deterrence of future contraventions of a like kind by the contravenor and by others”: Pattinson at [10].

[38]    The concept of proportionality is confined to striking a reasonable balance between deterrence and oppressive severity, Pattinson approving in that context what was said in Reckitt Benckiser at [152]:

If it costs more to obey the law than to breach it, a failure to sanction contraventions adequately de facto punishes all who do the right thing. It is therefore important that those who do comply see that those who do not are dealt with appropriately. This is, in a sense, the other side of deterrence, being a dimension of the general deterrence equation. This is not to give licence to impose a disproportionate or oppressive penalty, which cannot be done, but rather to recognise that proportionality of penalty is measured in the wider context of the demands of effective deterrence and encouraging the corresponding virtue of voluntary compliance.

(Emphasis added in Pattinson at [41].)

[39]    Where a contravener has already taken steps to mitigate the risk of future contraventions, deterrence may be effective with a more modest penalty: Pattinson at [60]. Effective deterrence of a well-resourced contravener may require a larger penalty: Pattinson at [60]. However, … it does not follow that a profitable and large employer must, as a matter of course, attract the highest penalty.

[40]    Drawn from Trade Practices Commission v CSR Ltd [1991] ATPR ¶41-076 at 52,152 (French J), quoted in Pattinson at [18], relevant but non-exhaustive considerations in the assessment of the appropriate penalty may include:

1.    The nature and extent of the contravening conduct.

2.    The amount of loss or damage caused.

3.    The circumstances in which the conduct took place.

4.    The size of the contravening company.

5.    The degree of power it has, as evidenced by its market share and ease of entry into the market.

6.    The deliberateness of the contravention and the period over which it extended.

7.    Whether the contravention arose out of the conduct of senior management or at a lower level.

8.    Whether the company has a corporate culture conducive to compliance, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.

9.    Whether the company has shown a disposition to co-operate with the authorities responsible for enforcement of the Act in relation to contravention.

[41]    State of mind is also an issue in this penalty imposition exercise. As was pointed out by the Full Court in Reckitt Benckiser in relation to state of mind in relation to civil penalty contraventions generally at [131]:

If a contravention does not involve any state of mind then it is for the party asserting any particular state of mind (be it a deliberate flouting of the law, recklessness, wilful blindness, “courting the risk”, negligence, or innocence or any other characterisation of state of mind) to prove its assertion. If, in the event, neither party discharges its onus to establish any particular state of mind in relation to the contraventions, the Court determines penalty on no more than the fact of the proscribed nature of the conduct (see, by analogy see R v Olbrich (1999) 199 CLR 270; 166 ALR 330; [1999] HCA 54 (Olbrich) at [22]–[28]). However, if any degree of awareness of the actual or potential unlawfulness of the conduct is proved then, all other things being equal, the contravention is necessarily more serious. Such awareness may be able to be inferred from the very nature of the conduct or representations constituting the conduct. However absence of such proof does not establish a mitigatory state of mind (see, by analogy, R v Storey [1998] 1 VR 359 at 369, quoted with approval by the majority in Olbrich at [27]; see also [25]). It means only that the neutral state of mind required for liability has not been disturbed for the purposes of penalty. If a contravening party wishes to go beyond the neutral statutory state of mind for liability and positively assert a lack of consciousness of the character of the conduct for the purposes of penalty, that is a circumstance of mitigation which the contravening party must prove.

[42]    Moreover, as the majority judgment in Pattinson pointed out at [46]:

A contravention may be a “one-off” result of inadvertence by the contravenor rather than the latest instance of the contravenor’s pursuit of a strategy of deliberate recalcitrance in order to have its way. There may also be cases, for example, where a contravention has occurred through ignorance of the law on the part of a [contravenor], or where the official responsible for a deliberate breach has been disciplined by the union. In such cases, a modest penalty, if any, may reasonably be thought to be sufficient to provide effective deterrence against further contraventions.

85 Degrees winding up its business in Australia and the significance of specific deterrence

31    An important part of 85 Degrees’ case on limiting the penalty to be imposed concerns the fact that it has effectively ceased business in Australia. In July 2022, its ultimate holding company, Gourmet Master Co Ltd, decided to wind up 85 Degrees’ business in Australia progressively by either waiting for franchise agreements to expire, or by terminating them. It has opted not to commencing any winding up procedures, however, to keep the company registered only for the purpose of these proceedings, including paying the substantial penalty it accepted would be imposed. The assertion to this effect was made in an affidavit by a witness who is domiciled in Taiwan, Mr Ling-Yang Yang, who is 85 Degrees’ present legal counsel and an employee of Gourmet Master. That affidavit was served a week or so before the penalty hearing.

32    Whether 85 Degrees’ business had in fact been shut down was challenged by both further FWO inquiries (which initially indicated that the business may in fact be continuing), and in a forensic cross-examination of Mr Yang. The FWO ultimately accepted, via her counsel, that 85 Degrees is not presently engaged in substantive business operations in Australia, and that there was no present intention for 85 Degrees to recommence business operations in Australia. However, the FWO noted that 85 Degrees remained a registered company and that it was not proven that it was financially incapable of re-commencing business. There was no tendered evidence of its current financial position, with the most recent bank statements and profit and loss statements dated 2022.

33    The FWO asserted that this set of circumstances did not only go to the question of capacity to pay the penalty, no such incapacity being asserted or relied upon by 85 Degrees, but also went to the question of whether 85 Degrees could make a future decision to recommence its business operations in Australia. This is relied upon by the FWO to maintain that specific deterrence remained relevant, albeit describing it as an attenuated need. While 85 Degrees does not assert that specific deterrence is no longer relevant, it submits that it is of much lesser significance. It also places reliance upon remaining available for the proceedings to conclude, a penalty to be imposed, and that penalty to be paid.

34    In all the circumstances, I consider that specific deterrence is not a major consideration in ascertaining the appropriate penalty. Staying registered in Australia to face and meet the consequences of the contraventions is a more substantial consideration. In my view that aspect of 85 Degrees’ conduct deserves particular credit, ameliorating substantially the need for specific deterrence.

The need for general deterrence

The deterrence equation

35    The concept of de facto punishment of those who comply by failing to sanction those who do not, identified by the Full Court in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25 at [152] and endorsed by the High Court in Pattinson at [102] is a paramount concern: see FWO v CBA at [38], reproduced above at [30]. The incentives to contravene, or not avoid contravening, or failing to prevent contravening (in the case of franchisors) must be met with the sternest of corresponding disincentives by way of substantial penalties.

36    For any deterrence effect in areas for which contravening conduct is sanctioned by civil penalties, the key driving factors are the risks of:

(a)    detection;

(b)    investigation;

(c)    proceedings being commenced;

(d)    proceedings being successfully concluded; and penalty being imposed.

37    As a general proposition, the lower the likelihood of any of these four related and cascading risks being realised, the greater the weight must lie in the size of the penalty in order for deterrence to be likely to have any meaningful effect. It is important to impose such a penalty that contraventions are seen to be uncommercial, even after factoring in a lower risk of being caught. That is, a much higher overall risk of all or any of the steps before penalty imposition means that a lower penalty may suffice to deter, while a realistically lower set of risks in reaching that point means that the consequences may need to be sufficiently serious to make it something to be avoided by compliance, falling short of being oppressive.

Industry context

38    In this case, while the risk of future contraventions by 85 Degrees is slight to non-existent, the risk of future contraventions by similar participants in the same industry is high, as is the risk in franchise arrangements in many other industries sharing similar characteristics, especially in relation to a vulnerable workforce. That much is demonstrated by the repeated contravening conduct by 85 Degrees itself and later in failing to take reasonable steps to prevent its franchisees doing more of the same.

39    Indeed, the exposé of systemic non-compliance by franchisees, particularly in the food retail industry and particularly affecting vulnerable workers on temporary visas, is the background to the package of reforms that introduced franchisor liability: Explanatory Memorandum, Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Cth) at [37] citing Senate Education and Employment References Committee, Parliament of Australia, A National Disgrace: The Exploitation of Temporary Work Visa Holder (Report, March 2016). The Bill’s Explanatory Memorandum makes specific mention of systemic underpayments by 7-Eleven franchisees, largely affecting international student workers, as an impetus for its reforms: Explanatory Memorandum at (i), citing A National Disgrace; FWO, Report of the Fair Work Ombudsman’s Inquiry into 7-Eleven (April 2016).

40    A report tendered by the FWO (and unchallenged by 85 Degrees) further highlights the scale of non-compliance by franchises in the food retail sector, and in turn the ongoing need for general deterrence: FWO, Emerging franchises compliance activity (Report, December 2019). FWO Report). From 2011 to 2015, the FWO investigated seven emerging franchisor businesses in the fast food, restaurant and café sector, including 76 franchisee businesses. Those investigations found that 78% of businesses were non-compliant with employment obligations. Reflecting to an extent the case at hand, the most common forms of contraventions related to issuing of pay slips (24% of franchisee businesses), payment of penalty rates (20%) and payment of minimum hourly rates (16%). It is in this context that the FWO identified, as of 2019, compliance in franchise networks as a strategic priority in 2019. In those circumstances, the Fair Work Act’s regulatory objectives can be supported significantly by deterrent penalties, thereby further advancing the objective of deterrence with which the Court is required to be primarily concerned following Pattinson.

41    Various reasons might explain such non-compliance rates. Like 85 Degrees, six of the franchises investigated are international chains that have entered the Australian market recently. The FWO Report notes that, again like 85 Degrees, such franchisors often have limited or no experience with Australian workplace protections regimes, and their franchisees employ in large part temporary visa holders, who are often more vulnerable to workplace exploitation.

42    Arrangements between franchisors and franchisees may also contribute to rates of non-compliance. For example, it was alleged that 7- Eleven’s business model encouraged underpayments of workers, as there was no way for franchisees to turn a profit otherwise after the franchisor took its revenue cut: Inquiry into 7-Eleven [5.6.1]; A National Disgrace at [8.72]-[8.82]. Similar facts are not alleged or admitted in this case, but if they were, that would likely justify an even stronger penalty response.

43    Relevant too, in the assessment of the need for general deterrence, is the industry context in which workers are especially vulnerable to exploitation. The unchallenged evidence relied upon by the FWO cogently demonstrates the vulnerability of retail workers to exploitation, and the way in which this is heightened by particular features of the food retail industry workforce. The food retail workforce includes, as in this case, a significant proportion of younger employees, transient employees, and employees who are overseas students or other visitors who are often going to be even less conversant with employment rights and entitlements than their domestic peers, including by reason of English being a second language and Australia being a different culture: see generally, A National Disgrace, especially at 141-266, cited in Explanatory Memorandum at (i), [37].

44    Younger workers will generally have had less work experience, making it is more difficult for them to identify where workplace practices are abnormal and unacceptable. The more limited work opportunities for these workers – particularly visa holders with restricted work rights – may also discourage them from voicing complaints to employers even where they are aware that violations have occurred. Such a workforce profile tends to create a confluence of factors conducive to exploitation and careless error in the first place, a much-reduced prospect of detection, and a lesser chance of successful investigation and enforcement.

45    That reasoning is supported by research conducted by the FWO, which establishes that between July 2019 and June 2023 the majority of reported disputes in the specialised food retailing industry (53.4%) pertained to young workers, though they made up only 35.4% of the sector’s workforce. That research also shows that, between 2019 and 2023, 30% of reported disputes in the industry involved workers on visas, compared to 18% across all industries. The most common visas held by such workers were international student and working holiday visas, under which workers are subject to work restrictions. That was starkly so for the affected franchisee employees in this case. Data from the Australian Bureau of Statistics (ABS) also shows that food and beverage services is the top employing industry for workers on temporary visas: ABS, Temporary visa holders in Australia (Statistical Report, released 28 April 2023).

46    To the credit of 85 Degrees, it did not take issue with the evidence referred to above, as was attempted by the respondent in Fair Work Ombudsman v NSH North Pty Ltd trading as New Shanghai Charlestown [2017] FCA 1301; 275 IR 148.

47    In these circumstances, a condign penalty is required, mainly in this case to deter other would-be contraveners, and especially other franchisors. For all the above reasons, enforcement is especially difficult, as I observed in the restaurant industry case of New Shanghai Charlestown at [131]-[134] and the cases, reasoning and vulnerability evidence referred to therein. Similar vulnerability and prevalence evidence was adduced by the FWO in this case as described in New Shanghai Charlestown at [133], which I again accept as going to the need for general deterrence.

Nature of the contravening conduct

48    Several features of the contraventions not already discussed also require particular note, picking up on factors identified by French J in Trade Practices Commission v CSR Ltd [1991] ATPR ¶41-076 at 52,152 (extracted in FWO v CBA at [40], reproduced above at [30]). The factors identified by French J in CSR, while not wholly applicable, do not point in any different direction. First is 85 Degrees’ pattern of contraventions: it first contravened as an employer, entered into an enforceable undertaking to desist, contravened further as an employer, and then with a change to a franchise model, failed to prevent its franchisees replicating substantially the same conduct. Not to prevent such conduct, or genuinely and substantially attempt to do so, when it must have known, or at least should have known, there was a real risk of its franchisees engaging in like conduct, must be viewed as deserving the strongest of deterrent responses. None of the contraventions were “one-offs” in any meaningful way.

49    Secondly, 85 Degrees did not ultimately find a way of achieving compliance by its franchisees, but rather gave up and has not really tried to do so at all.

50    Thirdly, 85 Degrees had actual knowledge of the contraventions throughout three-quarters of the contravening period. Failures by franchisors who are aware that contraventions are occurring within franchises, and yet fail to take adequate steps to address them, must be met with a strong deterrent response.

51    Considering all of the principles summarised above, and the context of the industry in which it occurred, this is not a case in which the need for deterrence, especially general deterrence, is other than of the utmost importance.

Cooperation, contrition and the impact on deterrence

52    The seriousness of the facts and circumstances in this case is tempered only to recognise, reward, and be seen to reward, cooperation with the FWO in admitting to the contraventions, initially as to the conduct, and then as to legal responsibility for it. There has been a substantial disagreement as to the level of discount that should apply for such cooperation. The FWO contends that the discount should be confined to 10%, whereas the 85 Degrees contends that it should be 20%. The dominant basis for the discount is the admission of liability, and the steps taken to give effect to that admission, by way of agreed facts.

53    Admissions to liability that are accepted by the regulator in full discharge of the contraventions alleged in an originating application are always going to be an important consideration in determining the final pecuniary penalty to be imposed. They are relevant both to specific and general deterrence.

54    The specific deterrence rationale for giving discounts for admissions of liability is that they are often one of the most potent indications of acceptance of wrongdoing, and therefore the strongest indication of reduced risk of recurrence, and therefore reduced need for deterrence in the penalty imposed. The earlier the admission, the more potent an indicator that is likely to be.

55    An admission of liability may also be taken to be an indication of contrition, which also goes to the need for specific deterrence. However, that will generally need to be evaluated through the lens of the strength of the regulator’s case. It may be that the admissions reflect the inevitability of the outcome. In this case, the FWO’s case for proof of the franchise the contraventions was likely to have been compelling. However, while the FWO’s case on the state of mind of 85 Degrees was also likely to have been reasonably compelling in light of the past contravening history, success on that front was less certain and therefore some greater weight can be given to admissions in that regard. Where contravenors have previously made admissions, but continued contravening regardless, admissions will also carry less weight as evidence of contrition. Such was the case here.

56    Such admissions also advance the objectives of general deterrence, by freeing regulator resources to be deployed for other investigations and compliance activities, a point acknowledged in Commonwealth v Fair Work Building Inspectorate [2015] HCA 46; 258 CLR 482 (Agreed Penalties Case) at [108]-[109] (Keane J) and reinforced by the focus on deterrence to the exclusion of proportionality to the seriousness of conduct in Pattinson. Such admissions have the capacity to increase the overall deterrence effect of the work of a regulator, here the FWO. That is because each proceeding that does not need to go to a trial on liability is likely to increase compliance and investigation activities in other cases, increasing the risks of detection, investigation, proceedings being brought successfully and other penalties being imposed to advance deterrence: see the analogous reasoning in the Agreed Penalties Case at [46] (French CJ, Kiefel, Bell, Nettle and Gordon JJ).

57    I consider it useful to give a general indication of the appropriate approach to be taken in relation to the discounts for cooperation, structured towards the objective of deterrence in the manner already outlined. The particular percentage figures that I indicate below are not of universal application. They are not rigid.

58    The following is the approach to discounts for cooperation that I have decided to apply to an otherwise appropriate penalty in this case, and perhaps to future cases, each of which is predicated upon the regulator accepting the admission as being in full satisfaction of the contraventions alleged in the originating application and any associated concise statement or statement of claim:

(1)    Admission of liability before the proceedings have commenced or soon after they have commenced: 25% discount.

(2)    Admission of liability in the defence that is filed: 20% discount.

(3)    Admission of liability after the defence has been filed, but before the proceeding is listed for trial: 15% discount.

(4)    Admission of liability after the proceeding has been listed for trial but before the trial commences: 10% discount.

(5)    Any admission of liability that takes place after the trial has commenced: no discount.

What is important about the above is the structure, rather than the particular percentages.

59    As to (5) above, the Full Court in Rural Press Ltd v Australian Competition and Consumer Commission [2002] FCAFC 213; 118 FCR 236 at [164]-[166] held that no cooperation in the conduct of the trial could be taken into account: see further on this topic, Australian Competition and Consumer Commission v Delta Building Automation Pty Ltd (No 2) [2024] FCA 580 at [81].

60    It may readily be seen that a 15% discount ([58(3)] above) is appropriate in this case because the admissions in the defence that was filed were confined to the franchisee conduct, and did not extend to 85 Degrees’ state of mind, which was always going to be the key issue. Full admissions covering state of mind as well came later. The value of these admissions is the only substantial factor that warrants a lesser penalty than the FWO seeks, and indeed not considering an even more severe sanction than was urged upon the Court. The Court has to be seen as lending its authority to the view that the outcome sought is not ever higher penalties, but rather ever higher levels of compliance (or lower levels of non-compliance) in relation to obligations that can readily, if not always easily, be met. As in the criminal law, prevalence, when it can be shown, is material to the level of deterrence required for general deterrence.

Conclusions on general deterrence

61    Given that only a proportion of contravenors in circumstances such as these will ever reach the point of facing the imposition of civil penalties, the temptation for franchisors is to avoid expending the necessary effort in time, money and inconvenience to ensure compliance. This is an important part of what must be deterred. Not being seen to treat such conduct with a sufficiently stern penalty response may be seen to reduce the incentive on those looking at their financial position and being tempted to let things slip, such as by not having systems of measuring, promoting and ensuring compliance, even if there is no deliberate decision not to comply (or as presently relevant, take all reasonable steps to ensure franchisees comply).

62    Part of the deterrence equation is, therefore, not just to encourage an upward spiral of compliance, but also helping to stave off a downward spiral of non-compliance. In the franchise context, it must not be seen as acceptable for franchisors to tolerate, or turn a blind eye to, franchisee contraventions as an ordinary part of business. The clear legislative intention is to encourage compliance by making franchisors responsible for non-compliance as well the employer franchisees. Slippage on all or any of the entitlement obligations and related record keeping obligations gives contravenors an immediate competitive advantage, and those who comply a competitive disadvantage, both ways extending to franchisors. Compliance virtue becomes a commercial vice, and compliance vice becomes a commercial virtue. Sufficiently severe sanctions are needed to prevent this from being the case: see [35] above.

63    I am satisfied that a very substantial overall penalty is required for the purposes of general deterrence, including by ensuring that compliant operators are encouraged to continue to comply.

Other disputed issues on penalty assessment for determination

64    The parties are divided on three other main topics as follows.

The s 557 statutory course of conduct issue

65    Section 557(1) of the Fair Work Act provides:

For the purposes of [Part 4-1], 2 or more contraventions of a civil remedy provision referred to in subsection (2) are, subject to subsection (3), taken to constitute a single contravention if:

(a)    the contraventions are committed by the same person; and

(b)    the contraventions arose out of a course of conduct by the person.

66    Section 557(2) defines “civil remedy provision” to include provisions breached by the 85 Degrees franchisees, being ss 44(1), 45, 535(1) and (4), and 536(1). The franchisor liability provision which 85 Degrees has breached, s 558B(1), is not included in that list.

67    Section 557(1) treats different contraventions of different civil penalty provisions as distinct; it does not work to render contraventions of different civil penalty provisions a “single contravention”, even where they arise from the same course of conduct. There is also some nuance to the construction of s 557(1) in so far as it relates to contraventions of s 44(1) and s 45, which arise from breaches of provisions of the National Employment Standards (NES) or terms of modern awards, respectively. In Rocky Holdings Pty Ltd v Fair Work Ombudsman [2014] FCAFC 62; 221 FCR 153, the Full Court made it clear at [23] that, for the purposes of s 557(1), “a civil remedy provision” refers to “the substance, not the mere existence, of the identified civil remedy provisions”. That means, for example, that multiple breaches of s 45 arising from failures to comply with different award terms cannot, by operation of s 557(1), be taken to amount to a single contravention, as each amounts to a distinct breach of a substantive obligation: Rocky Holdings at [11]-[27].

68    As noted above, the secondary liability of franchisors under s 558B(1) is not a “civil remedy provision” listed in s 557(2). However, as both parties correctly submit, s 557(1) applies to the treatment of contraventions by franchisees, a necessary component in making out franchisor liability, per s 588B(1)(a). On the construction of s 557(1) correctly advanced by the FWO, contraventions by franchisees will be taken to be a single contravention, for the purposes of s 588B(1)(a), where they:

(a)    were committed by the same franchisee;

(b)    were contraventions of the same civil remedy provision, including (as relevant), the same substantive provision or term of the modern award (per Rocky Holdings) or same substantive record keeping obligation described in the Fair Work Regulations; and

(c)    arose from a single course of conduct.

69    That construction is supported by the conclusions at [67] above as to the operation of s 557(1) on distinct contraventions of the civil remedy provisions. The requirement under s 557(1)(a) that contraventions be committed by the “same person” also makes it unavoidable that contraventions by different franchisees cannot be treated as a single contravention. Where the above criteria are met, this construction has the effect of treating contraventions affecting a number of employees of the same franchisee as a single contravention.

70    With two exceptions, relating to the application of s 557(1) to contraventions of different award terms and contraventions of record keeping obligations arising from the Fair Work Regulations, 85 Degrees adopts that construction. I turn to each now.

Grouping of Retail Award contraventions under s 45

71    85 Degrees submits that breaches of s 45 arising from failures to comply with different terms of the Retail Award should be taken as four contraventions: a single contravention by each franchisee. 85 Degrees attempts to distinguish the case in Rocky Holdings, where the direct liability of an employer for s 45 contraventions was at issue, from the present case, which involves secondary liability of the franchisor for contraventions by franchisees. 85 Degrees’ contention is that breaches of the underlying award terms that give rise to the s 45 contraventions are mere “particulars” of the contravention.

72    It is not apparent how the role of secondary liability changes the conclusions as to s 557(1) in Rocky Holdings. As the FWO correctly submits, s 557(1) does not apply to contraventions of s 558B(1), but affects the grouping of franchisee contraventions which are a necessary component of franchisors’ secondary liability. The grouping proposed by the FWO in relation to these contraventions must therefore be accepted as correct, and correspondingly the interpretation advanced by 85 Degrees must be rejected.

Grouping of record keeping obligation contraventions under s 535

73    85 Degrees advances a similar argument in relation to the grouping of certain kinds of franchisees’ record keeping contraventions. It is useful to first set out the statutory context.

74    Section 535 requires an employer to make and keep records in relation to each of its employees for seven years. The different kinds of records required to be kept are prescribed by the Fair Work Regulations: see regs 3.31-3.42. The FWO contends that the substantive obligation under s 535(1) is to keep and maintain each kind of record specified in the Regulations, which is analogous to the way in which the substantive obligation under s 45 is to comply with each term of the modern award. By extension of the reasoning in Rocky Holdings, breaches of such contraventions are distinct and incapable of grouping as a single contravention under s 557(1). The analogy is compelling. Under the FWO’s proposed s 557(1) groupings, contraventions of each record keeping obligation specified in the Fair Work Regulations are grouped for each franchisee as follows: regs 3.32(a)-(f), 3.33(1)(a) and (b), 3.33(2), 3.33(3)(c) and (d), 3.34, 3.40 and 3.36(1).

75    In its written submissions, 85 Degrees appeared to contend that the Fair Work Regulations specify the content of the substantive obligation created by s 535(1), and that failure to comply with the requirements specified in each individual regulation or sub-regulation are mere particulars of the contravention. On this argument, such contraventions can be treated as single contraventions of s 535(1), and failures to comply with specific requirements under each regulation or sub-regulation are merely particulars of a global record keeping contravention. I am unable to accept that global argument. However, 85 Degrees advanced a more nuanced argument in the course of oral submissions, of greater cogency.

76    In its oral submissions, 85 Degrees advanced a more modest argument: it agreed with the groupings of record keeping contraventions advanced by the FWO, with the exception of the treatment of those contained in reg 3.33. It is convenient to set out that regulation’s text in full before turning to this argument:

3.33 Records—pay

(1)    For subsection 535(1) of the Act, a kind of employee record that an employer must make and keep is a record that specifies:

(a)    the rate of remuneration paid to the employee; and

(b)    the gross and net amounts paid to the employee; and

(c)    any deductions made from the gross amount paid to the employee.

(2)    If the employee is a casual or irregular part‑time employee who is guaranteed a rate of pay set by reference to a period of time worked, the record must set out the hours worked by the employee.

(3)    If the employee is entitled to be paid:

(a)    an incentive‑based payment; or

(b)    a bonus; or

(c)    a loading; or

(d)    a penalty rate; or

(e)    another monetary allowance or separately identifiable entitlement;

the record must set out details of the payment, bonus, loading, rate, allowance or entitlement.

Note: Subsection 535(1) of the Act is a civil remedy provision. Section 558 of the Act and Division 4 of Part 4‑1 deal with infringement notices relating to alleged contraventions of civil remedy provisions.

77    Contrary to the FWO’s proposed groupings, 85 Degrees contends that reg 3.33 creates one substantive obligation with respect to creating and maintaining employee pay records. On the construction it advances, sub-reg (1) describes an obligation with regards to all employees, with sub-regs (2) and (3) describing specific requirements of that obligation applicable to certain categories of employees (eg, casual employees under sub-reg (2) or employees owed bonus entitlements under sub-reg (3)(b)).

78    After careful consideration of the language deployed in reg 3.33, I have concluded that 85 Degrees’ interpretation is to be preferred. There is a single obligation to keep pay records, as reflected by reg 3.33(1). The only reason why there is not a single set of obligations akin to those in reg 3.32 as to the content of the records as to the employer’s name, employee’s name and so on, is that it is clearer to list the separate additional requirements for recording the hours worked by casual or irregular part-time employees in reg 3.33(2) and for various kinds of additional entitlements such as incentives, bonuses, loadings or penalty rates in reg 3.33(3), rather than to use more convoluted language by listing all of them in reg 3.33(1). I do not consider that the fact that not all of those additional features will apply to all employees is enough to create multiple pay record obligations. As a matter of fact, for contraventions of this nature, it can readily be inferred that they arose from a single course of conduct, being a consistent failure by franchisees to keep required records. Indeed, it would be near impossible for contraventions to arise from separate courses of conduct.

79    It follows that all breaches of the different sub-regulations of reg 3.33 are but particulars of a single contravention, which must be grouped for the purposes of s 557(1). The schedule to these reasons of the proposed penalties reflects that conclusion.

Common law course of conduct issue

80    85 Degrees contends in the alternative that the common law course of conduct principle should apply to have the same effect as its proposed s 557(1) groupings. Following my findings above in relation to reg 3.33, this would affect only the treatment of the Retail Award contraventions. The FWO contends that application of the principle is unnecessary and inappropriate.

81    The course of conduct principle is an analytic tool which, in contexts where the legal and factual elements of contraventions overlap, may guide a court in identifying the appropriate penalty, the primary purpose of which remains deterrence: Pattinson at [45] (noting some tension exists between this purpose and the purpose the principle has historically served in criminal sentencing: see, Pattinson at [96]-[97] (Edelman J)). Unlike s 557(1), application of the common law course of conduct principle is discretionary: Construction, Forestry, Mining and Energy Union v Cahill [2010] FCAFC 39; 269 ALR 1 at [42].

82    If the principle is to have application in the present case, it must be at the level of franchisee contraventions. That is because franchisors’ liability under s 588B(1) does not arise from their conduct, but that of their franchisees. Liability is imposed by the provision on franchisors with certain knowledge of franchisee contraventions, who also cannot make out the statutory defence.

83    Application of the principle does not permit or require multiple contraventions arising from the same course of conduct to be treated as one contravention, subject to one maximum penalty: Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2017] FCAFC 113; 254 FCR 68 at [148] (ABCC v CFMEU). Rather, it directs courts to consider whether penalties for multiple contraventions arising from the same course of conduct are more than is necessary to deter similar conduct. I am not satisfied that, after applying s 557(1), considering the lower penalties proposed by the FWO, and providing some discount for the cooperation of 85 Degrees, a further downward adjustment is necessary or appropriate here. Application of the principle should not work to reward contravenors for systemic contraventions; such use would be contrary to the primary purpose of deterrence. Indeed, it may be the case that the principle’s application in cases involving multiple contraventions of the Fair Work Act should be limited to circumstances such as those listed in in ABCC v CFMEU at [149].

The percentage of the maximum penalty issue

84    The percentage of the maximum penalty sought by the FWO for each category of contravention is set out in the schedule to these reasons, reflecting revisions to the original schedule that the FWO proposed, including the addition of 85 Degrees’ stance. The impact of the application of the statutory course of conduct provision in s 557(1) has had a substantial effect, but so too has the FWO’s approach to contraventions prior to and after 85 Degrees having actual knowledge, from 1 April 2019, of the contraventions that were taking place. The discounts are at their greatest for contraventions wholly before 1 April 2019. Those after 1 April 2019 are identified with an asterisk in the schedule to these reasons. 85 Degrees does not take issue with any of the lower discounts, but generally seeks greater discounts than the lesser ones proposed by the FWO, while accepting some of those lesser discounts.

85    In relation to the record keeping contraventions, the approach evidently taken by the FWO, with which I generally agree, has been to seek a lower percentage of the maximum penalty to relatively formal record keeping requirements, such as those in reg 3.32. A higher percentage of the maximum penalty is sought by the FWO in relation to recording the payment of entitlements such as those in reg 3.33 in relation to substantive entitlements such as the rate of remuneration paid, the gross and net amounts paid, the hours worked and other entitlements such as loadings, penalty rates, over time, personal leave and termination of employment. I agree with that approach because record keeping goes hand in glove with detecting the fact of, and extent of corresponding underpayment. The same higher percentage should also apply to the failure to record the payment overtime (reg 3.34). Higher percentages of the maximum penalty should also apply to actual underpayment contraventions (namely, contraventions of s 45), and higher still after 1 April 2019, when there was actual knowledge by 85 Degrees as to what at least some of its franchisees were doing.

86    I consider that the FWO’s approach has been measured and proportionate to the real and substantial need for general deterrence. I am not satisfied that any substantial and convincing reason has been advanced for the greater discounts proposed by 85 Degrees.

Conclusions on penalty

87    I am satisfied that the final figures sought by the FWO before the application of the cooperation discount are appropriate, being a revision downwards from over $1.7 million to just over $1.6 million, further reduced by the conclusion reached above as to reg 3.33 to arrive at a sum of $1,694,700. I consider that this final penalty should be further adjusted by application of a 15% discount, rounded down to $1.44 million, being an appropriate and sufficient sum to meet the general objectives of deterrence, principally by reason of general deterrence. I see no need for any further reductions by reason of totality.

88    The declarations in substance as agreed will be made, and 85 Degrees will be ordered to pay a total civil penalty of $1.44 million.

Associate:

Dated:    4 June 2024

Schedule

Table 1. Terms used in tables 2 and 3

Table 2. Proposed and imposed penalties for individual contraventions1

Table 3. Total proposed and imposed penalties