Franchisors face increased exposure for franchisee underpayments, and Payday Super adds to compliance risk from 1 July 2026

Bakers Delight Case

In 2023, the Fair Work Ombudsman issued proceedings against Make Dough Enterprises Pty Ltd (Make Dough) and Bakers Delight Holdings (Bakers Delight) for underpaying employees.

Make Dough was a franchisee of Bakers Delight. Make Dough operated three Bakers Delight bakeries. The Fair Work Ombudsman claimed that the Make Dough had underpaid their employees to the total of $1.25 million between July 2017 and October 2020.

Importantly, the Fair Work Ombudsman claimed that the franchisor, Bakers Delight, was liable for $642,162 in underpayments which occurred after February 2019. Because it had knowledge that the franchisee had underpaid their staff after undertaking an audit in 2019, but failed to take any action to prevent underpayments as a result of their audit.

Why was the franchisor, Bakers Delight included in the proceedings?

Section 558B of the Fair Work Act 2009 (Cth) puts responsibility on the franchisors where a franchisee breaches certain laws under the Fair Work Act, including for underpayment of employees, or breaching employment standards.

The franchisor may be liable under section 558B where they:

1. have a significant degree of influence and control over the franchisee’s affairs. For example, by having a centralised payroll system which the franchisor can access and control; and
2. have knowledge or could reasonably be expected to have known that the contravention by the franchisee would occur.

The Fair Work Ombudsman claimed that Bakers Delight is liable for their franchisee underpaying employees under this section 558B.

Extra responsibilities on the franchisor

Additionally, section 557C of the Fair Work Act sets out that where an employer fails to keep proper records, the ‘employer’ becomes responsible for disproving an allegation of underpayment. This is known as the ‘reverse onus of proof’.

Although Bakers Delight argued that the section was not applicable because they are a franchisor and not the employer of the underpaid employees. The Federal Court did not agree, and in the case of Fair Work Ombudsman v Make Dough Enterprises (in liquidation) [2024] FCA 1432, the Court considered that Bakers Delight had the additional responsibility of disproving the allegations. Bakers Delight tried appealing for this decision, but the Full Federal Court rejected the appeal, and ultimately upheld the Federal Court’s original decision.

The decision emphasises the importance of  franchisors  keeping good records of payroll and other obligations under the Fair Work Act that previously would  be considered a franchisee’s responsibility.

What did the Court decide about liability, and why was the franchisor responsible?

The Court ultimately decided that Bakers Delight was liable under section 558B of the Fair Work Act because they conducted an audit in 2019 and therefore knew about the underpayments but failed to take reasonable steps to rectify the underpayments.

Will the incoming Payday Super changes impact franchisors?

From 1 July 2026, employers must pay their employees’ super contributions at the same time that they pay an employee’s salary or wages.

Employers are likely to increase the frequency of their contributions to align with their payment schedules. This is a significant change. Currently, employers need to pay the super contributions at least once every three months.

It is important to keep this new rule in mind after it comes into effect on 1 July 2026. A failure to pay superannuation, paying the incorrect amount of superannuation, or a delay in paying superannuation may be considered a breach of an employment award or enterprise agreement and breach the Fair Work Act. Where unpaid or underpaid superannuation amounts to a contravention of the Fair Work Act, the Bakers Delight decisions suggest franchisors may face increased exposure under s 558B if the statutory elements are made out.

What should franchisors do?

In light of the Full Federal Court’s decision in this case, and the changes to the Payday Super rules, franchisors should take proactive steps to ensure their franchisee network is compliant with applicable laws and regulations under the Fair Work Act, including by making changes to internal infrastructure if required.

This may include:

1. reviewing your franchise agreements for enforcement rights. Franchisors should ensure that they have the necessary rights under their franchise agreements to audit or monitor salary, wage and super payments, and if the franchisee is not compliant with the applicable laws and regulations, then the franchise agreement should allow the franchisor to require rectification or allow the franchisor to enforce other rights, such as a termination right;
2. improving franchisee training and resources. Franchisors, particularly those who require their franchisees to pay their employees through a centralised software, should ensure that that franchisees are well equipped to use such software, and provide them with additional educational resources regarding their payment obligations to their employees;
3. setting up clear policies. Employees should have access to policies which clarify how they may report a payment concern or other issues to the franchisor. If an employee reports a concern, franchisors must follow through with the steps outlined in the policy. This could include thorough investigation, providing an outcome to the investigation and payment (if required); and
4. maintain accurate records. Franchisors should maintain accurate and comprehensive payroll and superannuation contribution records. Where the franchisor does not have good recordkeeping, they may be required to ‘disprove’ that they underpaid employees salary, wage, or superannuation and exposes franchisors to a higher risk of liability.

Key Takeaways

• Late payments of super may also breach the Fair Work Act or an applicable award.
• Franchisors are recommended to have clear systems and infrastructure to deal with payroll and superannuation, and to proactively take steps to address franchisee non-compliance. This may include by:
  • reviewing franchise agreements to ensure franchisors can monitor payroll, access employment records and take steps under the franchise agreement to enforce non-compliance;
  • improving any payroll systems provided by the franchisor or internal payroll to minimise the risk of underpayments;
  • providing clear protocols and information for employees if they have a payment concern;
  • taking steps to address the employee’s concern in accordance with your policy, with the goal of addressing any franchisee non-compliance with their payment obligations; and
  • maintaining comprehensive payroll records, and records of super contributions.

If you have any questions about a franchisor’s obligations, please contact our Commercial Team below.