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7- Eleven, wages and the Franchise Code: The story so far

July 14, 2016

A recent decision in the Federal Circuit Court is one of the latest episodes in the ongoing 7-Eleven wages saga. Federal Circuit Court Judge, Michael Jarrett, saw fit to impose the largest penalty ever ordered for an action brought by the Fair Work Ombudsman on the operator of 7-Eleven franchise.

Judge Jarrett, found that the franchisee had “systematically exploited” his employees and had implemented “a business model that relied upon a deliberate disregard of his employees’ workplace entitlements”.

His Honour imposed over $400,000 in fines, pointing to the franchisee’s “contemptuous disregard” of Australian laws and his repeated attempts to deceive the Ombudsman.

It was heard that the franchisee had initially paid his employees a flat rate as low as $13 an hour. The franchisee created false records and fabricated entries into a payroll system run by 7-Eleven head office in an attempt to conceal the blatant underpayment. Judge Jarrett described it as “sophisticated system of data manipulation and false record keeping”.

The extent of the franchisee’s fraud only became apparent after a thorough investigation by Fair Work Inspectors. Even then, the franchisee tried to cover his tracks by providing the inspectors with false records.

After this falsehood was uncovered, the franchisee then made a token effort to back pay employees and showed inspectors selective bank statements supporting this claim. However, he only did so after arranging with employees to pay thousands of dollars back to him.

When confronted by the inspectors he denied making the request claiming it “would be wrong” to do so. Later he admitted to ordering his employees to pay him back.

The level of underpayment ranged from $1,673 to $21,966, while most employees were being paid just under half of their entitlements.

More recently, in July, action was brought against a 7-Eleven franchisee for reverse calculating employee wages. The franchisee had underpaid his employees by “totalling [the employees’] wages and then entering inaccurate hours and rates of pay into the payroll system”. The franchisee did so to create a set of records that dishonestly stated that employees were being paid at the correct rates.

More worryingly, the franchisee had previously entered into an enforceable undertaking with the Ombudsman. This resulted from underpaying employees via similar reverse calculations at another 7-Eleven store they operated. The franchisee failed to disclose the second store to the Ombudsman and continued the practice, despite fully understanding their obligations.

In a Federal Circuit Court hearing, Judge Suzanne Jones ordered the franchisee pay $150,000 in penalties, stating that “this conduct calls for full condemnation and approbation in determining the appropriate penalty”.

These two cases are not isolated incidents. In the time since July 2009, the Fair Work Ombudsman has brought action against eight 7-Eleven franchisees, four of which are still to be decided.

The now defunct Fels Panel had determined 350 wage claims leading to payouts totaling $11 million, prior to 7-Eleven shutting down the independent assessor and internalising the claims process.

In August 2015 the ABC program, 4-Corners, brought the illegal work practices in 7-Eleven stores to public attention. The Ombudsman had launched their own inquiry into the 7-Eleven franchise network in June 2014, following allegations of systematic and endemic non-compliance with workplace laws.

The Ombudsman published the inquiry’s findings in a report in April this year. They found that underpayment, false store records and other breaches of workplace law were common practice in stores.

The inquiry listed the lack of any workplace compliance monitoring, poor employee complaint handling and 7-Eleven employee demographics as major factors leading to the endemic non-compliance. The Ombudsman noted that 7- Eleven’s franchise model grants the franchisor 57% of its franchisee’s gross profits, in exchange for bearing some expenses normally covered by the franchisee, like rent and utilities.

Practically, this arrangement meant that 85% of a 7-Eleven franchisee’s expenses were related to employee wages. The Ombudsman found that this meant “the only lever available to franchisees to significantly reduce their costs and increase net profit” was controlling wage expenses.

Despite this, the Ombudsman has not been able to hold 7-Eleven’s head office liable for the actions of their franchisees. They have be unable to establish that 7-Eleven was ‘knowingly involved’ in the widespread underpayment of franchisee employees.

The evidence gathered by the Ombudsman in their inquiry could not overcome the high threshold for accessorial liability under s 550 of the Fair Work Act 2009, despite finding 7-Eleven management had evidence of employee underpayment since 2009.

Writing in response, 7-Eleven claimed that their ability to take steps against franchisees who paid workers incorrectly or kept inaccurate records was limited by the Franchising Code of Conduct.

The Ombudsman has since recommended a review of the Franchising Code to impose heavier duties on franchisors for the conduct of the franchisees.

These thoughts were echoed in a Senate Committee Inquiry into the exploitation of temporary visa holders. After brushing over the issues facing 7-Eleven and other franchise agreements, the inquiry recommended that amendments be made to the Franchise Code to make it simpler for franchisors to terminate agreements in the case of a serious breach of employment law. Critically they also recommended reviewing the feasibility of imposing greater duties on franchisors for the actions of their franchisees.

In light of the 7-Eleven scandal, both major political parties have voiced an intention to implement stricter penalties on employers who deliberately and systematically underpay employees. The Coalition, who are most likely to form the next government, plan to introduce new offence provisions to punish franchisors who ignore exploitative work practices used by their franchisees.
Franchisors and franchisees should prepare for tighter regulation. There has been some indication that the Coalition’s proposed laws may require franchisors to proactively monitor their franchisees’ compliance with workplace law.

Regardless, current laws in the Fair Work Act 2009 may catch franchisors that know about franchisee non-compliance and do not act. Further to that point, the wages scandal and the negative media attention has tarnished the reputation of the 7-Eleven brand. The risk of damage from a franchisee not complying with workplace law, is too great for a franchisor to ignore.

Companies operating franchises must urgently take steps to review their agreements. Since the 7-Eleven scandal, franchises have faced increased scrutiny and both franchisors and franchisees must ensure that all levels of their operation are compliant with workplace law. The National Retail Association will do its utmost to keep members informed of any potential changes to the laws governing franchises. Pending any changes, members should take time to consider the structure of their franchise agreements. If you find evidence of non-compliance you should act on it swiftly.

If you wish to discuss the workplace conditions or arrangements of your employees or your franchisees’ employees, the NRA is here to help, contact us on 1800 RETAIL (738 245). 

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