Legal Matters

last updated 29/08/2019


Labour Inspectorate to target Subway franchisees

last updated 29/08/2019


Updated 27 August 2019 – A Subway franchisee who failed to improve employment practices after a warning has made the company a ‘priority focus’ for investigators

The Employment Relations Authority (ERA) has ordered a Dargaville Subway franchisee, Healthop Limited, to pay nearly $10,000 in penalties and costs for breaches of the Holidays Act and failure to comply with a Labour Inspectorate improvement notice.

The Labour Inspectorate visited the Subway store as part of a proactive audit in 2017 and found it was not providing staff with correct pay for working public holidays, nor was it providing them with days in lieu. Part of the problem was that staff’s usual working days had been changed before Statutory Holidays, apparently in order to avoid having to pay employees their due entitlements. The Inspectorate subsequently issued an improvement notice on 18 April 2018 requiring Healthop to rectify its practices and calculate arrears to workers by 8 June 2018.

When Healthop failed to comply with the improvement notice, the Inspectorate lodged the case with the ERA. The ERA heard submissions in June 2019 and issued its determination on 24 July 2019.

Read what went wrong and see how franchisors can prevent similar problems in their own networks

‘Subway Dargaville was given an opportunity to set things right but chose not to do so,’ said Labour Inspectorate Regional Manager Callum McMillan in a media release dated 31 July put out by MBIE (Ministry of Business, Innovation and Employment). ‘The ERA ruling sends a clear message that ignoring the Labour Inspectorate will result in substantial penalties.’

The ERA found that most employees of Healthop were school or university students, and as such are particularly vulnerable. It also found Healthop gained financial benefit by not paying its employees their entitlements when they were due.

The determination orders Healthop to pay $7,000 in penalties and $2,225 in costs, with 21 days to comply with the issued improvement notice. According to the Companies Register, the directors of Healthop are Karen and Mark Flannagan of Maungaturoto.

Other franchisees face checks

The failure of the Dargaville franchisee to address the issues identified in 2017 will have wider repercussions for the brand, and for the businesses of other Subway franchisees, according to Mr McMillan.

‘Consumers are becoming more conscious of the ethics of the businesses from which they buy. It’s baffling that a highly visible brand such as Subway does not have assurance systems in place to ensure franchisees meet employment standards and comply with demands by the regulator. It also raises questions about Subway’s due diligence processes for those joining the brand.’

And he warns that ‘Subway franchisees can expect to be a priority focus for the Labour Inspectorate,’ suggesting that the brand’s franchisees will face further investigations over coming months.

A spokesperson for Subway advised, 'All Subway franchise owners are expected to meet employment laws. Non-compliance is unacceptable and can lead to termination of an owner’s franchise agreement. Subway is committed to working with the Employment Relations Authority to continue educating franchise owners about their employment responsibilities. A dedicated employment support service is available to all franchise owners and restaurant employees can access a Subway workplace hotline to report pay or other concerns.'

Subway would not confirm whether Healthop's franchise agreement has been terminated or whether it had previously been aware of the original improvement notice issued to the franchisee. The MBIE has confirmed to Franchise New Zealand that the Labour Inspectorate did not advise the franchisor until late July 2019, after the determination had been issued.

The full determination of the ERA case can be found at https://www.employment.govt.nz/assets/elawpdf/2019/6758b4deb1/2019_NZERA_439.pdf

Help available

As independent businesses, franchisees are responsible for their own employment practices and records. However, the Franchise Association (FANZ) has worked with the Labour Inspectorate over the past couple of years to help educate franchisors about their franchisees’ obligations.

FANZ has also amended the Code of Practice which applies to all its members to reinforce the need for franchisees to comply with employment law, as well as running educational sessions around the country and making additional resources available to all members. Subway is not a member of FANZ.

Read a summary of what went wrong and why franchisors may need to require notifications from franchisees

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