In April 2016, the Fair Work Ombudsman (FWO) released the report on its Inquiry into the 7-Eleven franchise network. The FWO found evidence that a number of 7-Eleven franchisees had underpaid their employees and falsified store data in contravention of the Fair Work Act 2009 (Cth) (FW Act).

The FWO also criticised 7-Eleven for failing to take steps that could have prevented the unlawful conduct from occurring within its franchise. However, despite these criticisms, the FWO concluded that 7-Eleven was not legally responsible for its franchisees’ conduct under current Australian workplace laws as 7-Eleven was not part of the employment relationship between its franchisees and their employees.

The FWO’s report followed a Senate Committee Inquiry into the exploitation of temporary work visa holders. That Inquiry made specific reference to the conduct of 7-Eleven and recommended a review of the Franchising Code of Conduct to impose a level of responsibility on franchisors for their franchisees’ conduct.

In response to the 7-Eleven issues and media reports of other similar cases of employee exploitation, the Australian Labor Party and the Coalition have announced separate workplace law reform policies ahead of the 2016 election. These policies would, in various ways, increase employee protections under Australian workplace laws and strengthen the powers of the FWO.

These proposals, and the 7-Eleven example, should cause franchisors to consider the arrangements they have in place with their franchisees concerning workplace practices.

THE FWO’S INQUIRY INTO 7-ELEVEN

From 2008, the FWO had received persistent reports from 7-Eleven employees alleging significant underpayment of wages, ultimately prompting the instigation of the 7-Eleven Inquiry.

The findings of that Inquiry were released in a report in April 2016, which detailed how a number of 7-Eleven franchisees had been paying their employees below the minimum award rate and falsifying store data to conceal their conduct. This typically involved franchisees only recording half of an employee’s rostered time while inflating the amount the employee was supposedly paid, to create the impression that employees were working less time for higher pay.

Other franchisees were found to have paid their employees above the minimum award rate, but would then require the employee to pay a portion of their wage back in an unrecorded cash transaction. The FWO report noted that most of the franchisees involved in these practices were aware of their obligations under Australian workplace laws, and had deliberately contravened those laws.

The FWO’s report identified a number of factors which had contributed to the widespread misconduct in the 7-Eleven store network, including:

  • the absence of any meaningful compliance monitoring or auditing by the 7-Eleven franchisor of its franchisees’ stores;
  • 7-Eleven’s poor handling of employee complaints, including requiring employees to be identified to the relevant franchisee before their complaint was investigated; and
  • the demographics of 7-Eleven employees, many of whom were international students working on student visas, who were reluctant to report misconduct by their employers, or in some cases, had been threatened by their employers if they complained to the FWO.

The report also noted that 7-Eleven operated an atypical franchise model in that it received 57% of its franchisees’ gross profits, but covered some expenses usually borne by franchisees such as rent and utilities. 7-Eleven also exerted a high degree of control over its franchisees’ businesses, including requiring franchisees to maintain specific stock levels, participate in certain promotions at the franchisees’ expense and manage the range of products sold in stores.

As a result of this model, the report found that around 85% of expenses borne by franchisees related to employee wages. This led the FWO to conclude that controlling labour costs was “possibly the only lever available to franchisees to significantly reduce their costs and increase net profit”.[1]

7-ELEVEN’S LIABILITY FOR ITS FRANCHISEES’ CONDUCT

Despite finding a number of inadequacies in 7-Eleven’s conduct, the FWO concluded that there was insufficient evidence to find 7-Eleven liable for contraventions of the FW Act by its franchisees. The FWO noted that the obligations under the legislation applied only to 7-Eleven’s franchisees in relation to their employees.

The FWO also noted that in order for 7-Eleven to be found liable as an accessory to these breaches (under section 550 of the FW Act), 7-Eleven would need to have been ‘knowingly involved in’ the contraventions. Mere knowledge or suspicions of general non-compliance would not be enough to establish liability. Rather, 7-Eleven would need to have been either involved in the contraventions themselves, or have had specific knowledge of the essential facts of each contravention alleged against a specific franchisee.

Ultimately, the FWO found it had insufficient evidence to justify bringing proceedings to establish that 7-Eleven was liable as an accessory for its franchisees’ contraventions.

STRICTER LAWS FOR FRANCHISORS ON THE HORIZON?

The FWO’s Inquiry into 7-Eleven coincided with a Senate Committee Inquiry into the exploitation of temporary work visa holders. Although not specifically the subject of that Senate Inquiry, its report made a number of references to the 7-Eleven issues and made several franchise-specific recommendations based on submissions from 7-Eleven related parties. The Inquiry recommended that:

  • the Franchising Code of Conduct be amended to make it easier for franchisors to immediately terminate a franchise agreement if there has been a serious contravention of a workplace law by a franchisee;
  • the Franchising Code of Conduct be reviewed to assess whether there is scope to impose greater responsibility on franchisors in relation to their franchisees;
  • the identities of migrant workers who report instances of exploitation to the FWO should not be provided to the Department of Immigration and Border Protection; and
  • the government commit to undertake an independent review of the resources and powers of the FWO and the appropriateness of the penalty, accessorial liability and sham contracting provisions of the FW Act.

The Australian Labor Party and the Coalition have also announced separate policies to strengthen Australia’s workplace laws, citing the 7-Eleven issues as evidence for the need for reform.

Labor’s ‘Rights at Work’ policy proposes to increase penalties for employers who deliberately and systematically underpay their employees and to increase protections for workers from sham contracting.

The Coalition’s policy promises a ten-fold increase in penalties for employers who deliberately and systematically underpay their employees; the introduction of new offence provisions for franchisors who fail to address exploitation by their franchisees; and new compulsory information gathering powers for the FWO.

HOW CAN FRANCHISORS PREPARE FOR STRICTER WORKPLACE LAWS?

It will be very important for franchisors to study the detail of any new laws and analyse carefully how their legal position may be affected by them. The Coalition’s proposed laws might require franchisors to take very proactive measures to monitor franchisees’ labour arrangements and their compliance with workplace laws. However, until draft legislation is prepared, franchisors must analyse their position against the current laws, and in particular the recent experience of 7-Eleven.

Two important conclusions can be drawn from the 7-Eleven story. First, the conduct of the relevant 7-Eleven franchisees in relation to labour issues generated very significant adverse publicity for the franchisor. Secondly, if the 7-Eleven franchisor had known about this conduct and not acted, it could have been found liable for it as an accessory under the FW Act. There is a certain tension between these two lessons-learned. How should franchisors respond?

It is suggested that franchisors review their arrangements with franchisees with a view to strengthening the obligations on the franchisee to ensure compliance with workplace and other laws. Sanctions for breach could be stiffened. Arrangements could be put in place for the franchisee to confirm periodically with the franchisor that franchisees are in compliance with workplace and other laws. However, if franchisors go further than this, and seek systematically to acquire knowledge of the particular labour arrangements of franchisees, they could expose themselves to accessorial liability. Of course, franchisors should act on any information of franchisee wrongdoing that they do happen to receive.

Franchisors should consider the following suggestions:

  1. Consider the design of the franchise model: consider whether the franchise model indirectly encourages franchisees to reduce wages or withhold entitlements, for example, where the model limits the franchisees’ capacity to control expenses or improve profitability. Any suggestion that such conduct would be an acceptable way to operate the franchise should be removed.
  2. Obligations under the franchise agreement: consider making a franchisee’s compliance with all applicable workplace laws an express requirement under the franchise agreement, as well as including a right for the franchisor to terminate the agreement if the franchisee breaches this requirement and fails to rectify the breach within a reasonable period.
  3. Incorporate compliance matters into any franchisee inspections: if a franchisor has a process in place for monitoring and assessing its franchisees’ compliance with the requirements of the franchise agreement (such as scheduled store inspections), consider expanding that process to incorporate a requirement for the franchisee to conduct and present to the franchisora self-assessment of their workplace practices. For example, franchisees could be required to sign an annual check-list indicating that they have complied with particular workplace practices as required under the franchise agreement.
  4. Act on evidence of non-compliance: franchisors should act promptly on any specific evidence of non-compliance by the franchisee which comes to the franchisor’s attention.

Clearly, franchisors need to strike an appropriate balance in each case between a level of oversight of their franchisees’ compliance with the FW Act while ensuring that they do not thereby step into the shoes of the franchisee employer and become an accessory to the franchisee’s conduct.

However, franchisors would be unwise to assume that the treatment of franchisee employees is not their business. Lawful and ethical treatment of franchisee employees is clearly in the best interests of all parties. Moreover, the significant brand damage that can be caused by the sort of conduct seen in the 7-Eleven situation, as well as the prospect of legislative change, makes the case for greater oversight by franchisors compelling.[2]