Behind the Headlines

Jason Gehrke | Director | Franchise Advisory Centre

Franchisors to be responsible for franchisees’ staff pay

In a move oddly reflective of the United States where franchisors are fighting a proposal for all employees of their franchisees to be treated as employees of the franchisor, Australian Greens MP Adam Bandt has announced he will introduce a private members bill to achieve effectively the same thing.

The bill by the Greens MP has been prompted by media reports that franchisees of 7-Eleven have engaged in a wage fraud scam that pays their staff only half (or less) of their proper earnings for the time worked. The wage fraud claims were first aired by a joint Fairfax/Four Corners media report on August 31, with allegations that franchisees were routinely forcing foreign student visa workers to accept long hours, but at only half the rate of pay. The workers were then threatened with deportation for exceeding the limit of 20-hours work per week allowed under their visa if they complained.

Although both the proposed Greens private members bill and the existing National Labour Relations Board (NLRB) decision in the United States share a common purpose of preventing wage exploitation, the Australian scenario differs from that of the US in that the franchisees alleged to be underpaying their staff are already breaking the law, whereas in the US wage rates are so low that franchisees who do pay the correct rate are still viewed as exploiting their staff. The private members bill is expected to make franchisors liable for any underpayments of staff by franchisees, exposing franchisors to potentially unquantifiable liabilities. It is reflective of arrangements 7-Eleven have put in place following its appointment of former ACCC chairman Allan Fels to an investigative panel that will receive any claims of underpayment by franchisees’ staff, which if approved, 7-Eleven will then pay and pursue the responsible franchisees accordingly.

Unfair Contracts laws to capture more franchises

The Senate Economics Legislation Committee has amended draft unfair contracts legislation to be applied to business to business contracts by changing the investment thresholds, and deferring its implementation.

The legislation was referred to the committee and given less than a month to report to government, including a brief public consultation period.

Under the initial draft legislation, small businesses that enter into contracts worth an upfront investment of up to $100,000, or an upfront investment of up to $250,000 where the contract lasts longer than 12 months would be affected, potentially resulting in unfair terms of contracts being rendered unenforcable, or in extreme cases, a whole contract rendered void.

The senate committee has now increased these contract thresholds from $100,000 to $300,000 for upfront contract payments, and from $250,000 to $1 million for contracts lasting more than 12 months. This means that almost all franchises will be impacted in future, whereas previously the threshold amounts would have primarily impacted service franchises, which have much lower investment levels than retail franchises. The new law defines a small business as employing fewer than 20 people, which means that it will also apply to small and developing franchisors who enter into agreements with larger organisations (such as suppliers).

Although the Small Business Minister has the discretion to exempt industries subject to mandatory industry codes of conduct from the effects of the legislation (such as the franchise sector in regards to the Franchising Code of Conduct), no exemption has yet been offered despite the sector still adjusting to the new Code which commenced on January 1 this year.

The unfair contracts legislation will apply to contracts entered into, renewed or amended after its implementation date, which will commence 12 months after the legislation is approved by the Governor General.

Sacked Grill’d worker wins payout, becomes union negotiator

A young female worker who was allegedly fired from her job at a Grill’d franchise in Melbourne after speaking out about the company’s low rates of pay has received a confidential settlement in the same week that the matter was due to be heard in the Federal Court.

Student worker Kahlani Pyrah, 20, was sacked for allegedly bullying two senior male managers at the Camberwell store 11 days after she raised concerns about underpaid wages and launched a legal application to replace the existing Grill’d employment contract with the modern award.  The Fair Work Commission has ruled that the workplace agreement at the Camberwell store must be replaced with a new award agreement. Ms Pyrah has since been offered a job as a bargaining agent with hospitality union United Voice, which says that Grill’d’s new pay offer is still less than the fast food industry award.

The dispute garnered national headlines and caused Grill’d to review its award rates and its policy of forcing all staff to undertake traineeships, which pay substantially less than award rates.

Former Kleenmaid director pleads guilty to criminal charges

More than seven years after its collapse, a former director of failed whitegoods retail franchise Kleenmaid has pleaded guilty to three criminal charges related to insolvent trading and dishonestly gaining loan facilities totalling $13 million. Kleenmaid was one of Australia’s highest profile franchise collapses in recent years, mainly due to the approximately 6,000 customers who had prepaid almost $25 million for whitegoods that were never delivered. Approximately 30 franchisees, who each operated a retail shopfront and sold whitegoods on behalf of Kleenmaid lost their businesses altogether, while a similar number of service franchisees who installed and maintained Kleenmaid products joined another whitegoods maintenance chain following the 2009 collapse.

The director, Gary Armstrong, will be sentenced in October. Two other Kleenmaid directors, Andrew and Bradley Young, have also been charged with up to 20 criminal offences, including fraud, as well as a further 18 charges of insolvent trading but are currently free on conditional bail. They could face up to five years jail for each charge, including charges of defrauding Westpac Bank of $13 million.

Pizza Hut franchisees launch class action over price war

Pizza Hut franchisees who claim they lost money and in some cases, their whole businesses as a result of being forced to sell pizzas below cost in a price war last year against rival chain Dominos have taken their franchisor to court in a class action. The franchisees have alleged in the Federal Court that Pizza Hut’s parent company Yum Brands breached its duties to the franchisees by denying them the opportunity to make a profit. A media report has shown one franchisee whose losses spiralled from $9,000 per month to $5,000 per week after trialling reduced prices for premium pizzas discounted to $8, then $4.95. The class action represents 288 of the 298 Pizza Hut stores nationwide, according to a media report.

ABC may compensate franchisees for store closures

The Australian Broadcasting Corporation (ABC) may offer compensation to the franchisees of its 78 ABC Centres who will be affected by the network’s decision to end its bricks and mortar retail operations. The broadcaster recently announced it will close the 50 company-owned stores in its 35 year old retail network, but will continue its retail offer through its online shop. The 78 ABC Centres affected by the closure are franchises within existing businesses, such as newsagents and bookstores.

ABC’s retail sales have been in decline over the last few years, with the growing potential of losses threatening to divert funds away from its broadcast operations exacerbated by government funding cutbacks.

Subway founder Fred DeLuca dies

Fred DeLuca, the founder of Subway, the world’s largest franchise chain, has died aged 67.

The highly successful entrepreneur was worth an estimated $3.5 billion but started his business empire humbly in 1965 at the age of 17 when he borrowed money to open a sandwich shop in order to help pay for his college education.

The company which owns Subway, Doctor’s Associates, was owned by DeLuca and his business partner Peter Buck, who provided the finance for the initial sandwich stores. DeLuca had a reputation for being a very hands on CEO and founder, and was involved in managing the 44,000 outlet business until he stood aside as CEO of Subway earlier this year, and appointed his sister Suzanne Greco to the role. It is understood he had been diagnosed with leukemia in recent years.