Legal Matters

last updated 22/10/2019

Employment issues: keeping franchises out of trouble

last updated 22/10/2019

A Subway franchisee has made the company a ‘priority focus’ for Labour Inspectorate investigators. How can franchisors prevent a similar problem in their own networks?

The Employment Relations Authority (ERA) has ordered a Dargaville Subway franchisee 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. You can read an outline of that particular case here; in this article, we’ll provide a simple summary of what went wrong, and look at how franchisors and franchisees might avoid similar issues arising in their own networks.

What went wrong?

The Daragaville case will undoubtedly make life difficult for other Subway franchisees in New Zealand over the coming months. So what went wrong? To put it simply,

1. The franchisee was doing the wrong thing in the way it was treating staff under the Holidays Act.

2. The franchisee didn’t tell their franchisor it had been issued with a warning notice, nor did it tell the franchisor that they were being hauled in front of the ERA when they failed to put things right.

3. The Labour Inspectorate recognised that this was an issue for the franchisee as the employer, not the franchisor, as the franchisee is an independent company. The franchisor was therefore unaware that there was a problem until after the determination.

4. However, the franchise brand as a whole was mentioned in the MBIE press release.

5. The Inspectorate has now announced it will be targeting other Subway franchisees.

Now, the franchisee could reasonably claim – as it did –­ that it thought it was doing the right thing in the first place. The Holidays Act is complicated and plenty of people get it wrong. But when advised that it was applying the Act incorrectly and issued with a warning notice, the franchisee didn’t rectify the problem when it was given the chance to do so. Instead, it continued to maintain that it did not have to pay those employees their due entitlements right to the end.

The franchisee could also have asked for the franchisor’s help in putting things right, which would almost certainly have been forthcoming. Instead, the franchisee ignored the problem until it was too late. Now they have put a target on the back of every other Subway franchisee.

Avoiding similar problems

The outcome of this case, and the comments made in the MBIE press release, make it clear that the actions of one franchisee can significantly damage the value of a franchise brand and impact upon the businesses operated by other franchisees.

So what can franchisors do to prevent such a situation arising in their own network? Clearly, educating franchisees about their obligations is important, and the Franchise Association (FANZ) has worked with the Labour Inspectorate over the past couple of years to help achieve this (Subway is not a member of FANZ).

However, barrister Deirdre Watson says that franchise agreements may need to be updated to ensure that, if a problem does arise in a franchised outlet, the franchisor must be notified.

‘Franchisors should ensure that their agreements require franchisees to report to them any communication or notice they receive from the Labour Inspectorate,’ says Deirdre. ‘This will alert franchisors at an early point and may avoid the escalation of any issues. They should also ensure they are being vigilant about checking that franchisees are aware of their obligations under employment-related legislation.’

Specialist franchise lawyer Scott Goodwin agrees, but warns: ‘Most franchise agreements contain clauses requiring franchisees to comply with all applicable laws relevant to the type of business being operated. However, whether the franchisor is ever advised of any breach of law by the franchisee is another matter entirely.’

‘As Deirdre says, ideally, there would be a clause in the franchise agreement requiring that the franchisee immediately notify the franchisor of any legal compliance issues (preferably as soon as the franchisee becomes aware of an exposure to a potential claim, or when it receives notification of a potential claim or allegation) and the franchisee would be required to fully disclose to the franchisor the nature, extent and details of the compliance issue and to take all steps required to immediately resolve the matter.’

Changing franchise agreements can be a lengthy (and potentially costly) process, though, so Scott suggests, ‘If the franchise agreement does not contain a clause like this, then it could be that the franchise operations manual is updated to record the notification and resolution process as an operational requirement.’


The Labour Inspectorate announced a couple of years ago that it would be targeting franchises in particular as part of a planned crackdown, and the timing suggests that the Dargaville investigation was one of the first cases. Since the announcement, there have been a number of investigations of some of the 37,000 franchised units in this country, but so far very few have resulted in action against franchises like the one quoted here. However, franchisors and franchisees do need to be on their guard to ensure that they are fully aware of their obligations to employees.

Almost no franchise names appear on the MBIE’s list of employers who have breached minimum employment standards.


Read the full story on page 66 of our digital edition of Franchise New Zealand magazine.

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