Franchisors take action on cheating franchisees

In the latest issue of Franchise New Zealand, we feature an article headed ‘wage cheat franchisees lose their businesses.’ A franchisee of a reputable brand was found to have underpaid employees at his two outlets by a total of $54,625. Not only did the franchisee have to pay staff the missing amount, but they were also fined $32,400 by the Employment Relations Authority. Perhaps worst of all, the franchisor took immediate action to remove them, and they lost both their businesses.

Since that issue came out – just four days ago – another two cases have been in the news. In both of these, the franchisees are no longer operating their franchises.

A Pizza Hut franchisee was sentenced to nine months’ home detention, 200 hours of community service and ordered to pay $150,000 in victim reparation for exploiting his workers. Davinder Singh, who owned four outlets in Gore, Richmond, Blenheim and Nelson, pleaded guilty to 25 charges after he exploited 12 Indian nationals who worked for him. His stores have since been sold.

Meanwhile, in Hastings, another former Pizza Hut franchisee has been sentenced for unlawfully hiring a worker and aiding a person to breach visa conditions. While the franchisee, Mahipal Reddy Kolan, has since sold his Pizza Hut business, he currently owns a franchise from a different brand.

Risky business

The interesting thing about this latter case is that the franchisee sought discharge without conviction, arguing that it might jeopardise his franchises. Judge Noel Sainsbury disagreed and said no franchise would be at risk for an offence of that nature. He added that even if it were, Kolan could pursue other business opportunities.

The judge’s view that ‘no franchise would be at risk for an offence of that nature’ would possibly not be shared by franchise lawyers. It is very common to see a clause in a franchise agreement that allows a franchisor to terminate the franchise forthwith where a key person or director of the franchisee is convicted of any offence. It’s not clear whether this was a factor in the two Pizza Hut cases where the offending franchisees are reported to have sold their stores, but franchisors have a duty to their other franchisees to protect the brand, so this clause gives them the power to force offenders out of the business where necessary.

If such a clause exists in Kolan’s agreement with his current franchisor, it means that he could not only lose the business where the offending occurred, but lose other franchises too if the franchisor decides to terminate the franchise in order to protect its reputation.

Comply or else

Deirdre Watson, a specialist franchise barrister, says that, ‘I have over the last three to four years noticed an increase in the instances of franchisees being investigated either by Immigration New Zealand or by the Labour Inspectorate with regards to breach of New Zealand employment and immigration laws. In turn, I have seen those investigations then produce a disastrous consequence for franchisees in terms of their franchise agreements, particularly where they are found to be guilty of an offence. This is because franchise agreements typically contain clauses which make conviction of a director or key person grounds for immediate termination.

‘I am unclear whether the increase of these instances necessarily means there is an increase in the offending behaviour. I think it is equally likely that there may be an increase in the resource being applied to police the behaviour. But, either way, the message is clear: franchisees need to ensure that they are fully compliant with New Zealand laws, or risk losing their franchises. And franchisors who want to avoid the negative publicity associated with such prosecutions need to ensure the franchisees are fully compliant.

‘The Hastings franchisee decision is yet another instance of the courts taking a robust approach where offences under employment and immigration laws are concerned. The decision shows that franchisees shouldn't expect any particular sympathy from the courts, even where a conviction is likely to result in the loss of another business.’

Watchdogs focus on franchising

The Labour Inspectorate has had a focus on franchising since early 2017, and was invited to present at the recent Franchise Association (FANZ) conference in Taupo to advise on how franchisors can better help ensure franchisee compliance with New Zealand employment law. Their presentation confirmed once more that the Labour Inspectorate publishes brands associated with any employment infringements, meaning that even if only 1 in 100 franchisees is not compliant, the brand will be in the news with all the consequences that implies.

The Inspectorate also advised that they will be publishing a report which may compare the employment compliance levels of franchised vs. non-franchised businesses. While one would expect franchises to demonstrate better compliance to employment practices, the Inspectorate suggested that this may not necessarily be the case – although problems may be more the result of errors than deliberate actions.’

Problems with how the Holidays Act is understood and interpreted have led to several companies, including franchisees of some well-known brands, having been found to have under-paid staff. The Government has responded to calls to make complying with the Act easier for all concerned by setting up the Holidays Act Taskforce, which has released an Issues Paper. Submissions are invited on the questions raised in the Issues Paper by 12 October.

‘This is something which concerns us all,’ says Robyn Pickerill, the CEO of FANZ. ‘Franchising cannot be perceived to profit from the under-payment of workers, even as the result of a genuine mistake. In conjunction with the Labour Inspectorate we have put together a list of suggestions for facilitating franchisee compliance with employment laws. This is available from the Info Hub on our website.’

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