Proactive franchisor compliance encouraged by FWO received with ignorance

Dr Ashlea Kellner

The barista at your local coffee chain might be underpaid, but there’s probably not a whole lot the franchisor is going to do about it.

The Franchise Council of Australia has indicated that franchisors are very keen to commit to their legal obligations publically, to avoid being put in the same basket as 7-Eleven. However, the Fair Work Ombudsman advised that recent invitations to franchise CEOs to discuss the possibility of entering voluntary Compliance Partnerships have been almost exclusively declined.

In a speech to New South Wales members of the Franchise Council of Australia on September 1, Fair Work Ombudsman Executive Director of Dispute Resolution and Compliance, Steve Ronson, warned franchisors of the significant risks and costs of ignoring non-compliance in franchised stores. Such risks and costs are clear in the case of 7-Eleven, which has risked its brand and reputation and will likely face costs upward of $50 million.

A key reference in Ronson’s speech was an article published in the Journal of Industrial Relations earlier this year by myself and colleagues at Griffith University. Our research identifies how the franchise business model is structured in such a way that it is in the interests of franchisors to put systems in place that create incentives for franchisees to operate at the lowest possible labour cost.

Image courtesy of Shutterstock (216482392)
Image courtesy of Shutterstock (216482392)

Essentially, when labour costs are low, the franchisor and franchisee win. When non-compliance is exposed however, the whole system – even compliant franchisees – are negatively affected. Internal detection or proactive compliance thus appear to be the logical choices, however it is more likely many franchisors will bury their heads or attempt to create legal distance from the non-compliance issue.

In the words of one franchisor approached by the Fair Work Ombudsman to enter a compliance partnership, involvement in franchisees’ business – and ensuring franchisees are compliant with workplace laws – does not “fit with their business model”.

The Fair Work Ombudsman are encouraging franchisors to follow the lead of highly profitable businesses such as McDonalds and Dominoes and enter into a Compliance Partnership. The weak response to their recent invitation may be a sign that non-compliance within Australian franchises is much more far reaching than the public expect, and may well extend beyond the recent focus on the vulnerable migrant workforce.

Compliance is expensive and the gains of underpayment or similar non-compliant behaviours may be so great that they are deemed worth ignoring.

Australian franchisors have some tough decisions to make, but as Steve Ronson concluded in his address, “compliance costs… but recovering your reputation costs a truck load more”.

This article was authored by Dr Ashlea Kellner, Research Fellow, Centre for Work Organisation and Wellbeing: a.kellner@griffith.edu.au.

For further comments on the 7-Eleven non-compliance findings, and the Journal of Industrial Relations article referenced above, please consult the following stories:

  1. We are very focused on the muffins’: Product trumps employment matters in franchises
  2. Business model at heart of 7-Eleven saga
  3. Why franchises care more about their coffee than their people