Greens bill would be a huge blow to franchising

A proposal by Greens Senator Adam Bandt to regard franchisors as the ultimate employers of their franchisees’ staff is nanny state politics that attempts to solve the wrong problem, and will imperil Australia’s $144 billion franchise sector.

 Bandt’s proposal, as reported in the Fairfax press, is expected to result in a private member’s bill to be put to Parliament in the next few weeks. It appears to have been triggered by recent media reports about potentially widespread wage underpayment by franchisees of convenience retail chain 7-Eleven. Foreign students were allegedly threatened by their employers with deportation if they did not accept wages approaching half of the minimum award rate.

While Bandt’s proposal to hold franchisors ultimately accountable for payroll violations in their networks may be well-intentioned to protect vulnerable foreign students from exploitation, it fails the sniff test on two key points.

Firstly, it assumes that wage fraud is an endemic, franchising-specific problem.

Secondly, it overlooks the more sensible and vastly more practical solution of making employers personally liable to their employees for unpaid wage entitlements.

In the first instance, media reports about wage fraud allegations in 7-Eleven have overlooked the fact that the vast majority of franchisees drawn to convenience retail businesses are from countries where wages are not centrally regulated, particularly India and China.

Culturally, these business operators are hard-wired to negotiate wages on a case-by-case basis rather than adhere to a government-mandated scale, and are potentially more inclined to consider government regulations as general guidelines, rather than black letter law.

 This does not mean to say that all migrant business operators from such countries will ignore Australian employment laws, but it does raise the distinct possibility that cultural orientation may be a bigger contributor to the problem than any particular franchise business model.

Underscoring this point is the words of Mohammed, an underpaid student visa worker, who in this interview posted online by Fairfax specifically identifies the cultural backgrounds of the business owners who are allegedly exploiting workers:

 “Then you approach a 7-Eleven and mainly most of the time it’s owned by – 80% would say – owned by overseas people, Indians or Pakistanis or even Chinese or someone like that and they know your weakness.” (This quote appears 32 seconds into the video).

The cultural orientation of the business operators who are engaging in wage fraud is the elephant in the room that seems to have escaped scrutiny so far.

Again, this does not vilify all business migrants, but does suggest that those who abuse the rights of young visa holders should probably have the status of their own visas examined more closely where applicable.

It is also a complete furphy to portray the problem of wage fraud as endemic in franchising.

Any independent business, particularly one operated by those culturally pre-disposed to negotiating wages, could equally engage in wage underpayment, but of course these are far less worthy of media attention because they can’t be conveniently grouped under a recognisable brand.

To return to Bandt’s suggestion that franchising is somehow to blame because reports claim the wage fraud was widespread in the network overlooks the reality that bad business practices can be as contagious as any disease.

Such practices are not limited to wage fraud, but could also include under-declaring income to minimise or avoid tax, paying creditors late, in part or not at all, and other behaviours that business owners of any persuasion may undertake if they think nobody’s watching them and there are no consequences for non-complicance.

Franchising is not the villain here, but it is an easy target. And Bandt is scoring a cheap hit against an easy target because tackling the problem properly would require a more comprehensive approach that acknowledges the elephant in the room.

The second problem with Bandt’s solution is that it overlooks the more sensible and vastly more practical solution of making employers personally liable to their employees for unpaid wage entitlements where those claims have been upheld by a court.

The ABC’s Four Corners report which accompanied the Fairfax reports on wage fraud in 7-Eleven highlighted the plight of one worker who was awarded their outstanding backpay by a court following a Fair Work investigation, and yet still received nothing as their employer simply liquidated their business to avoid the payment.

 The Four Corners footage showed the employer driving away from the court in a Porsche Cayenne, a very expensive car. It is hard to believe such a person could not have personally afforded to foot the bill for his employee’s unpaid work, and as a director of the company, should be pursued for just retribution.

Bandt hasn’t offered a bill to increase ASIC powers to go after such types who deliberately turn up their nose at the system. Instead he has offered a populist nonsense predicated on the exposure given to one brand, and falsely assumed that the owners of all franchise brands are as wealthy as the owners of 7-Eleven.

Again, a reality check is needed here. More than 90% of franchise systems in Australia are locally-created brands, with the majority owned by the mum and dad entrepreneurs who developed a system that they subsequently offered to other mum and dad operators as franchisees.

Although both Fairfax and Four Corners constantly highlighted the apparent wealth of the owners of 7-Eleven, I doubt any family-owned franchise brand in the nation could claim membership of a hypothetical “franchisor’s billionaire club”.

Many franchisors run businesses that are not much larger than those of their franchisees. According to the 2014 Franchising Australia survey, fewer than half of Australia’s 1160 franchise brands have more than 50 outlets, and any move to make a franchisor financially accountable for the employment misdeeds of its franchisees could potentially send small franchisors to the wall. Historically, where franchisors go bust, their franchisees often follow.

 If it gets up, Bandt’s proposal could pose such a disincentive to existing and future franchisors that it might conceivably result in a partial withdrawal by some franchisors from franchising as a growth strategy.

 Band’t proposal has huge implications. It is an ill-advised knee-jerk reaction that misses the point altogether. A more comprehensive one is needed, but not one that threatens the franchise sector in this way.

Jason Gehrke is the director of the Franchise Advisory Centreand has been involved in franchising for more than 20 years at franchisee, franchisor and advisor level. He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.