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PKF Australia

Accountants and Business Advisers

Wage underpayment – no franchise is immune

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Clayton Hickey

Partner

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Wage underpayment – no franchise is immune

Wage underpayment is the biggest issue ever faced by the franchising community, it isn’t going away and the franchisor is about to become liable.

7-Eleven have repaid $114 million and counting. That’s just the tip of the iceberg. Allegations have been made against franchisees across a suite of Australia’s largest franchises including Domino’s Pizza, Muffin Break, Pizza Hut, Red Rooster, Baker’s Delight and Caltex. Wage underpayment is effecting franchises across the country and it appears that no franchise is immune.

With the media closely following franchise wage underpayment stories, the stakes are high for franchise owners. Since Four Corners aired the ‘7-Eleven: The Price of Convenience’ in August 2015, Fair Work Australia and Senate inquiries were conducted and a media onslaught ensued. The level of media and regulator scrutiny devoted to this issue sent alleged franchises into damage control to protect their carefully cultivated brand. The 7-Eleven experience shows the irreparable brand damage such an event is capable of. 

The Australian Franchising industry employs 460,000 people across 1,160 franchisors. Many of these workers are students and recent arrivals to Australia on visas with little understanding of employment laws or the concept of award wages, leaving them ripe for exploitation by franchisees.

In the wake of this, the Turnbull government introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 in March. Previously, the franchisor had no liability for any underpayment occurring in their franchise network, with the likes of 7-Eleven and Caltex setting up assistance funds as a goodwill gesture to the impacted workers. The bill is a game changer franchisors will be responsible for underpayments by franchisees or subsidiaries for the first time.

With the increased liability comes a tenfold increase in penalties. If the bill is passed, serious contraventions will attract fines of up to $108,000.

There is a ‘get out of jail free card’ for the franchisor in the bill. A franchisor is not liable when they have taken reasonable steps (i.e. compliance measures) to prevent the kind of contravention that occurred. The bill doesn’t go into detail, leaving decision-making around what constitutes as ‘reasonable steps’ up to the franchisor. If wage underpayment was found to be taking place, those ‘reasonable steps;’ would then be scrutinised by a regulator and decisions made about whether the franchisor had complied.

Since 2015, PKF has been partnering with some of Australia’s largest franchisors in the design and implementation of compliance measures from the ground up, bespoke to the intricacies of the franchisor and their network. Some of the common measures we’ve assisted franchisors implement include:

  • Ensuring that the franchise agreement requires franchisees to comply with workplace laws
  • Establishing a whistleblower hotline for employees to report any potential underpayment to the business
  • Conducting workplace training for franchisees
  • Auditing of franchises in the network
  • Encouraging franchisees to cooperate with any audits.

Franchisors often come to us asking, “How do I know if it’s happening in our network?” In our experience, we’ve identified some red flags that increase the risk of underpayment by franchisees:

  • Paying employees in cash
  • Not preparing or retaining rosters, timesheets, employment contracts, payslips or similar documentation
  • Requesting financial assistance from the franchisor
  • Store performance that doesn’t align with the network
  • High number of employees on visas
  • Franchisees that avoid calls or are difficult to contact.

Franchisors need to be on the front foot in rolling out their own compliance measures, as media and regulator scrutiny appears to be heating up the push for Fair Work Act amendments intensify and regulator raids continue.


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