Employment fraud a risk for franchises

In 2015, a team of investigative journalists in Australia broke a sensational story about the exploitation of workers in the 7-Eleven chain of convenience stores there. The story alleged that underpayment and wage fraud were common practice within the majority of outlets operated by franchisees and, worse, that 7-Eleven’s business model actually relied upon such practices. Later investigations found that many of the allegations had substance and 7-Eleven agreed to change its business model.

In November 2016, another investigation alleged similar issues within Caltex Australia – the same Caltex Australia that is buying Gull in NZ. These have not been confirmed, but Caltex has already been auditing some franchisees and has terminated some franchise agreements as a result. In the same month, a case involving the Yogurberry franchise brought by Australia's Fair Work Ombudsman for the first time secured penalties against a master franchisor for being an accessory to the exploitative practices of one of its associated companies.

So far, no such allegations have been made against any franchises operating in New Zealand but the publicity given to the cases in Australia – and the plaudits given to the journalists involved – means it’s almost certain that the media here will be keen to find similar issues. There have been a number of exploitation cases involving independent outlets, of course: the Masala chain of Indian restaurants is perhaps the best-known, but others have included a Napier bakery and a Rotorua kebab shop.

The Labour Inspectorate of the MBIE has warned that it is targeting smaller retail businesses looking for employment law breaches, and it seems likely that should one franchised outlet be caught out, it will trigger a full-scale audit of others within the same chain. A Labour Inspectorate manager has already commented, ‘Time for franchisors to ensure franchisees are complying with employment law.’

Common elements

The common elements in such cases generally include not paying minimum wage, not paying holiday pay, and falsifying or not keeping accurate employment records. However, in the 7-Eleven and Caltex cases, it’s also been alleged that some franchisees withheld passports from staff or falsified wage records by paying staff the correct amount then standing over them while the staff members withdrew cash from ATM’s and paid back the ‘extra’.

In the Caltex case, one worker allegedly received a late-night visit from an associate of the franchisee threatening him if he spoke up. The next day, his family in Pakistan were visited by four armed men. He is now fearful of talking to authorities or the media in case the threats of violence against his family are carried out.

Implications

The implications for franchisors of these cases are massive. There is currently a move among legislators internationally to see franchisors classified as ‘joint employers’ of franchisees’ staff for regulatory purposes. 7-Eleven has already agreed to set up a compensation scheme for exploited workers, paying out $50 million to date, with estimates that it could reach $100 million. This sets a precedent which many franchisors see as endangering the whole basis of franchising: independent businesses trading under a common name and operating systems.

Actions

So what – apart from having a robust business model that does not encourage franchisees to cheat on their employment obligations – should franchisors be doing to prepare themselves for a similar investigative onslaught in New Zealand? Well, the Fair Work Ombudsman in Australia has found that many franchisees derive their understanding of payroll from their past experience as employees, from other franchisees, or from ill-informed advisors.

Accordingly, the first thing franchisors need to do is ensure that their franchisees are fully aware of New Zealand employment law and what it actually means. The second thing is to ensure that they have the payroll software and practices in place to comply with the law. And the third is to audit their franchisees’ employment practices on a regular basis to ensure that all staff have proper contracts in place, that holiday and wage records are up to date and that staff receive their full entitlements.

Yes, it’s another burden for the franchisor, but it’s already in place in some major brands and will soon be regarded as best practice. It needs to be – because anything else can lead to disaster.

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