Franchisees penalised for exploiting migrant workers

Two former North Island Four Square businesses and their owners have this year been penalised by the Employment Relations Authority (ERA) for exploiting migrant workers in 2023. In both instances there were examples of workers paying an illegal premium of up to $60,000 to secure jobs with the supermarkets, funds which were then effectively used to pay the employees’ own wages. A complex series of Labour Inspectorate investigations began after workers complained about the premiums and other deliberate breaches of employment law. 

The ERA penalties (respectively $44,000 and $80,640 plus Labour Inspectorate costs) have come on top of repayment of the premiums and wages arrears to employees made after the Labour Inspectorate began their investigations. Little or none of the penalty sums have been awarded to the employees themselves. 

Neither store is now trading as a Four Square, with Four Square franchisor representatives from Foodstuffs North Island expressing their disappointment at the conduct of the previous owner-operators and promising to review systems and oversight of businesses operating under the Foodstuffs NI brands (Four Square, New World and Pak’nSave are all Foodstuffs franchised brands).

When does the franchisor act?

When it comes to franchisee compliance with employment laws, franchisors must walk a fine line between providing guidance and monitoring compliance. The franchisees’ businesses are their own and staffing matters are their own responsibility. But when the actions of one franchisee threaten to seriously harm the reputation of the franchise as a whole, a franchisor is obliged to act in defense of the brand.

Katriona Ikenasio, Labour Inspectorate Investigations Manager (Northern), said the Labour Inspectorate had a longstanding history of engaging with Foodstuffs and the wider supermarket sector to promote understanding of employment standards and support sustainable compliance. MBIE and the Labour inspectorate also take a collaborative approach with the Franchise Association of New Zealand (FANZ) to encourage franchises networks in all industries to be vigilant about those same standards and compliance.

But Katriona pointed out that sector engagement does not replace accountability; it can only help build awareness of obligations while ensuring that individual employers remain responsible for meeting them.

Franchise specialist Scott Goodwin of Goodwin Turner Commercial Lawyers, said that it is important for the franchise agreement to contain an obligation for the franchisee to immediately notify a franchisor of any complaint, claim or investigation made against them associated with serious matters like this.

“A good franchise agreement will include a specific obligation to comply with both the general laws of the land and specific employment laws; to immediately notify any non-compliance; to provide all applicable information and disclosures so that the franchisor can undertake its own assessment of the compliance issue and the potential impact on the network and the brand; and for the franchisee to take all steps as are necessary to rectify the issue.

“Once the investigation of a franchisee by the Labour Inspectorate is underway, the franchisor would need to quickly undertake its own audit to determine the level of risk to the franchise brand and network and whether or not the franchisor should potentially look to exercise its contractual discretion to terminate the franchise agreement.”

Is termination the right response?

Scott acknowledged that termination of a franchise agreement for a compliance issue should not necessarily be an automatic response, as in some cases there may be other ways to work through the breach. However, he points out that in some instances the magnitude of the issue and the extent of the damage to reputation and goodwill does justify termination (whether unilateral or mutually agreed) – all of which needs to be assessed and determined on a case-by-case basis with legal input.

“If it seems clear that employment laws have been deliberately breached,” he said, “termination in the circumstances as reported by the media is more likely to be deemed a proportionate response, with any subsequent disputes or injunctions against termination by the franchisee highly unlikely to succeed.”

Foodstuffs North Island would have had no real alternative in these two cases, but to terminate their agreements (either unilaterally or by mutual agreement) with the owner-operators and debanner the stores as soon as it became apparent that the complaints were founded in truth.

Getting employment right

Franchise New Zealand recently published an article by Abhay Kolhe of MBIE's Employment System Guidance & Engagement team, to explain just how franchises can best deliver positive outcomes for workers and businesses as franchise networks grow.