As a franchisor, you must understand how employment laws fit within your franchise model. The importance of understanding and complying with these laws has only increased in recent years as changes to relevant legislation mean there is now significantly more risk to franchisors if their franchisees fail to comply. For instance, consider the scandals surrounding 7-Eleven in recent years. This article will examine the 7-Eleven breaches, looking at the potential factors that led to these violations and highlighting the risks for franchisors of failing to avoid 7-Eleven’s mistakes.
What Was the 7-Eleven Scandal?
In 2015, it was revealed that there was a systemic underpayment of employees and doctoring of payroll records throughout the 7-Eleven franchise network by its franchisees. Many of the employees affected were particularly vulnerable such as international students threatened with deportation by franchisee managers. As a result of this systemic failure, 7-Eleven employees were reimbursed $173 million in underpaid wages, interest and superannuation. The franchisor was required to enter into binding undertakings and received a vast amount of negative publicity.
Franchisees and Employment Law
Every franchisee should consider their financial viability before starting or entering a franchise. This consideration is equally as important when modelling your franchise systems. In particular, when considering what franchise fees to charge your franchisees.
If you charge too much in franchise fees, franchisees can struggle to profit. Consequently, franchisees may need to cut costs to keep their business afloat. Underpaying staff is then tempting, which risks franchisees exposing themselves to breaches of employment legislation.
It has traditionally been seen as the franchisee’s responsibility to comply with employment law. For example, most franchise agreements contain clauses stating that the franchisor can terminate the 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, following the 7-Eleven Scandal, it has become increasingly apparent that compliance with employment law is the franchisor’s responsibility. Franchisors have used internal compliance systems to ensure franchisees do not break the law. Now it is more important than ever that you put well-designed and monitored compliance systems into place. Further, you should adequately train your franchisees to ensure their compliance and adherence to any relevant legislation.
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As a franchisor, recent changes to Australian law have increased the importance of ensuring that your franchisees comply with employment legislation. Under these changes, ‘responsible franchisor entities’ can now be directly liable for any breaches of the Fair Work Act by their franchisees where the franchisor:
- knew, or could reasonably be expected to have known, that a relevant contravention would happen;
- at the time the infringement happened, knew, or could reasonably be expected to have known, that an infringement of the same or similar kind was likely to happen; and
- has not taken reasonable steps to prevent the infringement entirely or simply one of the same or similar character.
‘Responsible franchisor entities’ are those who have a significant degree of influence or control over their franchisees. Given the significant penalties available for any breaches of the legislation, it is now more critical than ever that franchisors ensure that they are implementing practical steps to ensure franchisee compliance with employment laws.
What Steps Can Franchisors Take to Ensure Legal Compliance?
Some recommended steps for you to ensure your franchise model complies with the law are:
- educating and training incoming and existing franchisees on the necessary employment laws and what they have to do to comply with them;
- having summaries and reference guides in the franchising manual;
- ensuring franchisees provide their employees with adequate education on their rights and entitlements, such as providing them with the Fair Work Information Statement;
- conduct proactive auditing of your franchise network by regularly checking that your franchisees are complying with their employment obligations and paying employees appropriately; and
- implement a transparent process which allows employees to make any complaints directly to you so that you are as informed as possible.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Key Takeaways
Ensuring franchisees comply with Australian employment legislation has never been more critical for franchisors. To stay on top of these issues inside your franchise model, make sure you:
- consistently monitor your franchisees;
- implement consistent systems to ensure compliance across the network; and
- ensure franchise fees are not overly burdensome on franchisees so that they end up underpaying their employees.
If you need help ensuring your franchisees comply with their employment law obligations, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
As a result of the systemic underpayment of employees across the 7-Eleven franchise network, stricter laws are now in place, and greater scrutiny is on franchisors to ensure their franchisees are not underpaying their employees.
Yes, under new legislation, you can be liable if you knew or could reasonably have known that a breach of the law would or was likely to happen and you failed to take reasonable steps to prevent it.
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