GETTING EMPLOYMENT RIGHT IN FRANCHISING

Franchising is one of New Zealand’s most established and influential business models. It drives rapid growth, supports entrepreneurship, and creates thousands of jobs across a wide range of sectors.

From MBIE’s perspective, franchising also presents a unique opportunity. When employment practices are established well from the outset, they can deliver positive outcomes for workers and businesses as franchise networks grow.

MBIE’s Labour Inspectorate and Employment Services teams work closely with franchisors, franchisees, and industry groups like the Franchise Association of New Zealand.

 Based on MBIE’s work, many employment issues in the franchising sector appear to arise from non-compliant design and use of payroll systems, not understanding employment obligations, or insufficient support for franchisees in managing complex employment requirements.

MBIE’s view of the franchising sector

Done well, franchising can provide the structure, consistency and support needed to achieve strong employment outcomes.

However, the model also has characteristics that can unintentionally amplify risk, including:

• multiple franchisees running under one brand
• varying levels of capability and experience across franchise owners
• centralised systems that are replicated widely
• commercial pressure, particularly in labour‑intensive sectors

When a misunderstanding or poor decision is built into a franchise system, it is often repeated across multiple sites. As a result, MBIE sometimes sees the same employment issues across multiple franchise sites, sometimes years after the original decision was made. From a regulatory perspective, repeated issues across a network can show the problem sits within the end-to-end system itself, rather than being isolated to individual stores.

As a regulator, MBIE provides education and takes enforcement action where needed. Our focus is preventing harm to workers and supporting businesses to comply with their obligations. Enforcement is used where necessary and proportionate. Within this context, franchisors play a critical role in prevention.

Common employment issues in franchising

Recent cases involving franchised operations consistently highlight a small number of recurring themes, including:  

• non-compliance with minimum employment standards, particularly around minimum wage, annual holiday pay, public holidays, and record-keeping and employment agreement requirements
• misunderstandings around availability clauses and hours of work
• unpaid trial shifts or informal work arrangements
• vulnerabilities for migrant workers, including reliance on employers for visas and lack of clarity around rights
• failures to act early when issues are identified, allowing arrears and penalties to grow

One clear takeaway from these cases is that many of these matters could have been prevented through clearer guidance, stronger oversight, and earlier engagement.

The following examples are based on anonymised cases MBIE regularly encounters across the franchising sector.

Case Study 1: When “trial” means payable work

In one case, a franchisee engaged a worker for what they believed was a short “trial” to assess suitability. The worker performed normal duties over several shifts but was never paid, as the franchisee understood this to be standard industry practice.

After the worker made a complaint, an n investigation found that the worker was an employee who completed work which should have been paid at least the minimum wage, with proper records kept. As a result, back pay and compensation were ordered by the Employment Relations Authority.

Key lesson:  Unpaid trials are one of the most common misunderstandings in franchised businesses. While genuine assessment processes are allowed, work that benefits a business must be paid. Clear franchisor guidance at the recruitment stage could have prevented the issue entirely.

Case Study 2: Payroll systems do not remove responsibility

In another case, a franchisee relied on payroll software and external advisers to calculate pay and leave entitlements. Over time, mistakes in holiday and leave pay built up and affected several staff.

When the problem came to light, the business had to repay staff, comply with compliance orders, and pay penalties - despite the underpayment being unintentional.

Key lesson:  Using payroll systems or advisers does not transfer legal responsibility. Franchisors who understand common payroll risk points and support franchisees with audits or guidance can significantly reduce these outcomes.

From MBIE’s experience, employment law compliance in franchising is most effective when treated as a lifecycle responsibility, aligned with the commercial life of the franchise contract. We suggest taking a lifecycle approach - utilising the following PLAN - SOURCE - MANAGE stages.

PLAN: Designing compliance into the franchise model

The plan stage is where many future problems are either prevented — or unintentionally created. Good franchisors treat employment obligations as a core system requirement, rather than solely a responsibility of individual franchisees.

This includes:

• embedding minimum employment standards within franchise agreements and operating manuals
• providing compliant, up‑to‑date employment agreement templates
• setting clear expectations around record‑keeping, payroll, and leave
• clearly distinguishing between employees and contractors

From MBIE’s perspective, planning for compliance is not about taking over the franchisee’s legal responsibility. Rather, it is about designing a system that does not set franchisees up to fail.  This benefits both franchisees and the brand as a whole.

Where employment expectations are unclear at the start, franchisees may rely on their own assumptions, often based on industry norms or advice that may not be complete or accurate.

SOURCE: Recruitment, due diligence, and early decisions

The source stage covers recruitment, onboarding, and entry into the franchise system. It is one of the riskiest points in franchising from an employment law compliance perspective. Many of the more serious employment issues MBIE investigates originate at this early stage. This stage includes not only the hiring of employees, but also the onboarding of new franchisees themselves.

Doing due diligence on prospective franchisees 

An often-overlooked part of employment law compliance is due diligence on prospective franchisees. Because franchising replicates business practices at scale, patterns tend to follow people as much as systems.

Good franchisors take reasonable steps to understand:

• whether a prospective franchisee has previously operated a business with employees
• any history of employment disputes, minimum standards breaches, or poor employment practices
• the individual’s understanding of their responsibilities as an employer
• their willingness to follow system guidance and escalate issues early

This approach is not about exclusion. It is about identifying when prospective franchisees may require additional support, guidance, or safeguards before entering the system. Where past behaviour is not addressed, the risk of future problems can increase.

MBIE regularly sees employment issues repeat with the same individuals across different businesses. Early checks and the right support can help prevent this from happening again.

Onboarding of employees 

At the operational level, common pitfalls at the source stage include:

• employees starting work without a signed employment agreement
• confusion between lawful trial periods and unlawful unpaid “trial shifts”
• inadequate explanation of hours, availability, and pay
• poor understanding of obligations when employing migrant workers

Many of the complaints MBIE investigates arise early in the employment relationship. These issues often grow because non-compliant arrangements made at the start were never fixed.

Clear franchisor guidance, and straightforward rules can help prevent small issues from developing into systemic failures.

MANAGE: Oversight, escalation, and intervention

The manage stage is where employment systems are tested over time. Even well-designed systems require monitoring, reinforcement, and, at times, firm intervention.

MBIE consistently sees strong employment outcomes where franchise systems are well managed. In these systems, employment law compliance is treated as ongoing operational oversight rather than a one-time check.

Oversight and early engagement 

Good franchisors actively check employment practices across their network. This may include:

• reviewing payroll and leave calculations
• finding inconsistencies across sites
• encouraging internal audits or reviews
• responding quickly to issues raised by workers or franchisees

MBIE’s experience shows that repeat non-compliance across multiple franchise sites is a strong signal of system level problems rather than isolated mistakes.

Escalation and exiting franchisees where necessary 

While education and support are the primary tools, there are circumstances where serious employment allegations are proven and decisive action is required.

From MBIE’s perspective, franchisors who:

• ignore substantiated allegations,
• allow serious breaches to continue unchecked, and
• fail to use contractual levers,

will increase risk not only to workers, but to the brand and the wider franchise network.

 Where breaches are serious, repeated, or deliberate, removing a franchisee can be both justified and necessary. Doing so reinforces employment law compliance is a condition of participation in the system and helps protect its overall integrity.

While MBIE does not tell franchisors how to make decisions, we consistently see better outcomes where franchisors:

• treat employment compliance as a condition of participation in the system
• escalate matters in line with franchise agreements
• act when remedial action is refused or ignored
• have strong systems that are supported not only by guidance, but by credible consequences when standards are not met

Guidance for new franchisees

Anyone looking to buy a franchise should pay close attention to employment law compliance from the outset.

Prospective franchisees should ask:

• What employment guidance and templates are provided?
• How does the franchisor support payroll and leave compliance?
• What oversight or auditing occurs?
• What happens if employment issues arise?

Asking these questions early can help set realistic expectations and avoid costly remediation later.

Owning a franchise does not remove legal responsibility as an employer. Even with strong systems, franchisees remain accountable for meeting minimum employment standards. Understanding this upfront helps new entrants make informed decisions and budget appropriately for compliance.

MBIE’s role: Support, education, and proportionate enforcement

 MBIE’s role in the franchising sector is not to dictate how businesses operate, but to ensure employment standards are met and workers are protected.

Our approach prioritises:

• education and accessible guidance
• early engagement and problem solving
•  enforcement tools such as improvement notices and enforceable undertakings as opportunities to fix issues
• enforcement through the Employment Relations Authority or Employment Court where risks are serious, repeated, or ignored

Franchisors who engage early, design good systems, and support franchisees through challenges are far less likely to meet enforcement.

Final reflections

Most employment issues in franchising are predictable and preventable. They do not arise because franchising is flawed, but because employment obligations are complex and easy to misunderstand without deliberate consideration.

By applying a Plan–Source–Manage lens across the franchise lifecycle, franchisors can significantly reduce risk and improve outcomes for workers and brands alike.

 MBIE views franchisors as important partners in preventing employment issues. When employment law compliance is embedded into franchise systems from the outset, rather than addressed later, it leads to more resilient businesses and better outcomes across the sector.  

For practical guidance, tools, and resources, franchisors and franchisees can visit https://www.employment.govt.nz/ for education focused support.