Recent scandals which plagued Caltex and 7-Eleven have demonstrated why franchisors must understand how employment laws fit within their franchise model. We explain the breaches below, focusing on how franchisors structured their franchise fees as well as some of the potential factors that led to these violations.

Franchisees and Employment Law

Every franchisee should consider their financial viability before starting or entering into a franchise. This consideration is equally as important for franchisors when modelling their franchise systems – particularly, what franchise fees to charge.

If a franchisor charges too much in franchise fees, then franchisees can struggle to make a profit. Consequently, franchisees may need to cut costs to keep their business afloat. Underpaying staff is then tempting. However, as 7-Eleven and Caltex show, franchisees expose themselves to employment law breaches. As a result, 7-Eleven and Caltex are now considering changing their franchise model following public pressure and research.

It is the franchisee’s responsibility to comply with employment law, and most franchise agreements reflect this view. For example, most franchise agreements contain clauses stating that the franchisor can terminate the franchise agreement immediately if a franchisee does not comply with relevant laws. This approach uses a franchisee’s potential loss of money to ensure that they do not exploit workers.

However, it’s equally as compelling to argue that compliance with employment law obligations are the franchisor’s responsibility. Franchisors have used internal compliance systems in the past to ensure franchisees do not break the law. For example, 7-Eleven tried to implement a compliance system that made sure that franchisees complied with the law. However, this system was easy to manipulate and resulted in a lack of oversight of franchisees.

What Risks Do Franchisors Run by Not Having an Effective Franchise Model?

The recent McDonald’s settlement in the US demonstrates how it is possible for franchisors to be liable for their franchisees’ breach of laws. Currently, Australian law has not moved in the way that US law has to find franchisors vicariously liable for their franchisees’ actions.

However, there are pushes to change the law to allow franchisees the right to claim against the franchisor. In the case of 7-Eleven, this argument arose from the fact that the franchisees argued that the franchisor knew the breaches were occurring and did nothing, or at least turned a blind eye.

Key Takeaways

At the moment, the law does not state that franchisors will be responsible for the exploitation of workers by their franchisees. However, there are pushes to change the law, and the public backlash witnessed in the Caltex and 7-Eleven scandals show that franchisors need to consider making their franchise model commercially viable for their franchisees to encourage compliance with the law.

Are you operating a franchise network? Are you considering reviewing your franchise model and agreements? Our franchise lawyers are happy to assist. Call us on 1300 544 755 for assistance.

Sam Auty

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