Do Your Homework
Franchising has been a firm part of the Australian retail landscape for almost fifty years, long after the first round of fast-food chains became part of our culture.
Despite decades of great success, the entire sector has been firmly in the spotlight over the past 18 months, for all the wrong reasons. From gross underpayment and exploitation of workers; to Fairfax edia’s expose on the underpayment of hundreds of Domino’s Pizza staff (not to mention some franchisees who were caught offering Australian residency visas in exchange for cash) – you don’t have to look very far to see examples of when things go horribly wrong. While the media reports are disturbing to say the least, it’s crucial to note that these cases of serious non-compliance are the exception, and not the rule.
For every bad headline, there are thousands more who are running successful, flourishing franchise businesses every day.
According to the Franchise Council of Australia*, as of 2016, there were 1120 brands supporting 79,000 separate small businesses, that collectively employed around 470,000 direct employees, and with a ombined sales turnover of around $146 billion!
At the time those figures were collated, only 1.8 per cent of franchisees were involved in a substantial dispute with a franchisor over the 12 months prior.
It’s inevitable there’ll be some conflict between a franchisor and franchisee along the way (and should be embraced as a crucial component in a dynamic and flourishing business relationship).
Franchise or no franchise, there will always be entries and exits, so it’s crucial to have a clear understanding of what you’re in for, how you’re going to make it work, and what your and the franchisor’s obligations are, long before you sign on the dotted line.
Running a small business in the Australian retail sector involves hard work – if it was easy, everyone would be doing it, but it can be incredibly rewarding too – and there are plenty of steps you can take to make sure your franchise becomes one of the success stories.
You wouldn’t invest your life savings and stitch up a monster loan for a house without expert advice, and a franchise is no different. Just because it’s a name you know, love, and see doing well as a proven business model, doesn’t mean it’s going to work for you. When you buy a franchise, it’s your responsibility to make it work financially so do your homework, and do it without emotion.
Even a simple Google search on the brand can tell you a great deal, so check it out on the ASIC website; run a credit check; find out who owns the group of companies your chosen franchise is part of, and what their stories are. Do the company directors have any black marks against their names? Does the franchisor require you to buy from specific suppliers, and if so, does it have permission from the regulator to do so? What about the numbers – do the figures add up to you and your accountant, and do you have a financial safety net if things don’t go to plan? Above all else, get professional legal advice, from a lawyer who specialises in franchisee arrangements.
A second layer of due diligence relates to your employee entitlements.
Australia has one of the most complex industrial relations systems in the developed world, and it just got a little bit tougher for the franchise sector after the introduction of the Fair Work Amendment Protecting Vulnerable Workers) Act 2017 (the Act), which took effect on September 15, 2017.
The Act was a direct response to the 7-Eleven employee exploitation and underpayment scandal, as well as other underpayment scandals including Caltex and Domino’s Pizza.
These key changes include:
- Higher penalties for ‘serious contraventions’ (read: 7-Eleven-style breaches) of workplace laws. The maximum penalty has increased ten-fold, with a maximum penalty equating to $126,000 for individuals and $630,000 for corporations.
- Increased penalties to employers for keeping false or misleading employee records, and/ or providing a false or misleading pay slip.
- Reverse onus of proof on employers where record-keeping requirements were not met – so if you’re accused of not paying correct entitlements, it’s up to you to prove otherwise, to the satisfaction of a court.
- Extended liability provisions for franchisors and parent companies.
- Increased investigative and evidence gathering powers for the Fair Work Ombudsman, including to inspect and require employers provide employment records and attend interviews under oath.
When taking over an existing franchise, an often-overlooked item during the due diligence process arises when you, the new owner, take on staff previously employed by the old owner. You need to make sure that the employment arrangements in place are lawful, and that provision has been made for any liability for leave entitlements that you will be taking on.
Most importantly, you need to remember that the courts will not care if, “That’s the way the last owner did it”. If the last owner of the business paid their staff under the wrong Award and you simply continue without questioning the arrangement, you could soon find yourself in hot water.
Adequate recording systems for time and wages recording and reporting
It’s not enough to know you’re paying all your staff the correct Award – these changes mean it’s never been more important to be operating accurate systems for recording time and wages – all of which must then be kept unaltered for seven years, and be readily accessible for inspection.
There are myriad payroll software options out there for small business, however it’s generally much easier to produce things like compliant pay slips and records using automated cloud payroll software – many of which also include business tools to help you maintain compliance, and help both you and your employees manage the day-to-day operations. Employers have enough to do, so utilising automated payroll and employee management software can free up a great deal of your time to focus on your business.
There are apps available also, and the Fair Work Ombudsman’s Record My Hours app makes it quick and easy for employees to record and store the hours they work, as well as information about their wn employment. Staying up to date to avoid noncompliance It’s incredibly difficult for busy SMEs to find the time (and inclination) to study and stay up to date with the ever-evolving industrial relations landscape.
Our industrial relations system is difficult to navigate, and as we’ve seen with last year’s amendments to the Fair Work Act, changes can be swift and have far-reaching consequences.
The largest areas of non-compliance uncovered in the Caltex inquiry were pay slips and employment records, followed by penalties, overtime loadings and allowances.
The Fair Work Ombudsman found that 76 per cent of audited Caltex franchises had been underpaying their workers, and only six of 25 sites operated by 23 Caltex franchisees in Brisbane, Sydney, Melbourne and Adelaide inspected were compliant with workplace laws.
FWO Ombudsman Natalie James called it an unsustainable model, and unsurprisingly, the company announced to the ASX that it would be transitioning franchise sites to company operations.
While the Caltex case was an extensive breach and a clear indication of a flawed system, it’s fair to say the vast majority of Australian franchisees who find themselves on the wrong side of compliance ssues don’t intend to do so.
The National Retail Association is an employer organisation that’s here to help employers navigate these and other HR and compliance issues, and keep you up-to-date on any changes to the industrial landscape that might affect you.
We have a dedicated team of legal professionals who specialise in these areas and are on hand, every day, to provide expert guidance on these and other issues common to running a retail business.
If you’d like more information on franchisee arrangements, please don’t hesitate to get in touch.
As the National Retail Association’s Senior Workplace Advisor and Lawyer, Alexander Millman provides advice and representation to a collective network of more than 19,000 retail, fast food and quick service outlets nationwide. This includes representing members and providing expert guidance in the modern award review process (including appearances before the full Bench of the Fair Work Commission) and individually in discrete cases before industrial tribunals. While specialising in the complexities of employment law, Mr Millman also advises and represents members across general commercial litigation in various State courts.
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* Franchising Australia 2016 report