With more international cases emerging where franchisors are being held liable for employment law breeches committed by franchisees, how can they protect themselves?
In early July, two 7-Eleven franchisees in Melbourne were fined $150,000 in a prosecution by the Fair Work Ombudsman (FWO). They had built a property portfolio worth approximately $3m while systematically underpaying their staff $84,000 over a 12-month period.
As a result, the parent company had to set up a wage repayment program to settle an average of almost $40,000 per worker for more than 3,000 claims. So why did 7-Eleven end up footing the bill for this bad practice?
The FWO report found that 7-Eleven operated an atypical franchise model, in that it received 57% of its franchisees’ gross profits but covered some expenses they would usually bear such as rent and utilities. 7-Eleven also exerted a high degree of control over its franchisees’ businesses, including requiring franchisees to maintain specific stock levels, participate in certain promotions at the franchisees’ expense and manage the range of products sold in stores.
As a result of this, the report found that around 85% of expenses borne by franchisees related to employee wages. This led the FWO to conclude that controlling labour expenditure was “possibly the only lever available to franchisees [that would allow them to] significantly reduce their costs and increase net profit”.
The 7-Eleven case has begun to erode the tradition of ‘separate legal entities’ – whereby the risk of employing people lies with the franchisee. The Australian government has since announced workplace law reform to shift responsibility for franchisees’ conduct regarding employment practices to the franchisor. They will now be held liable for the breaches committed by their franchisees “where [they] should reasonably have been aware of the breaches and could reasonably have taken action to prevent them from occurring”. Meanwhile, penalty hikes for breaches – from $51,000 to $510,000 – have been introduced to act as a further deterrent.
And this is not an isolated case. In July 2014, the US National Labor Relations Board (NLRB) ruled that – despite legal distinctions that classify franchisors and franchisees as separate entities in terms of liability – McDonald’s could be classed as a ‘joint employer’ when it came to several cases dealing with franchisees’ infringement of their employees’ rights.
One way of dealing with this is keeping franchisees at arm’s length as far as possible to ensure that franchisors can prove they are separate legal entities. However, a major problem with this is that customers only see the one brand, whether it be the McDonald’s on their local high street or its global headquarters. The two are intertwined.
Whilst these cases are happening thousands of miles away, what happens in the US or in Australia could certainly happen here. Our culture and society is changing, with more emphasis than ever on customer rights and growing moral responsibility being placed on corporations. UK franchisors must consider the arrangements they have in place with their franchisees concerning workplace practices.
Because of this, it is high time franchisors got on the front foot when it comes to their franchisees’ workplace compliance. So what can you do to protect your brand and support your franchisees to run their businesses properly?
First of all, every business needs to ensure it is legally compliant at a minimum. As a franchisor, you have a duty to the people that are buying into your brand and model. You need to ensure that the franchise model you are selling is viable, can turn a profit and that the person has appropriate resources behind them. In the UK, this is not regulated by government like it is in Australia and Canada. The onus is on the franchisor to get these crucial aspects of its model right.
Business owners are not always aware of employment legislation and case law and are at risk of making costly mistakes. Franchisors should thoroughly induct and train their franchisees on their systems and model, whilst outlining how to run their business and uphold the brand. But, despite it being incredibly important to minimise risk, many franchisors do not educate and support their franchisees in employing staff.
First of all, get your franchise agreement right. Make sure these issues are covered off and that the liability for employment of staff within a franchise sits squarely with the franchisee. Secondly, ensure that you reiterate this in the business manual and during the induction. Be clear on what you expect in terms of treatment of staff and where the liability lies. Thirdly, implement an HR system of support that, at a minimum, includes contracts, handbooks and policies. And, finally, monitor this along with the rest of your business compliance, taking action where necessary.
There are also various options for supporting your franchisees with their HR and employment law that go beyond compliance and could help them recruit and retain the best staff.
First of all, try issuing standard contracts and handbooks for your franchisees to use; these will need to be kept up to date every time there is a legislative or case law change. Additionally, look at introducing training courses on good recruitment and employment practices, guidelines on staff engagement and an employee benefits offer. Other important protections might include sourcing employers indemnity insurance for your franchisees, ensuring the values of the organisation are adopted by all staff members and introducing an helpline for when franchisees have queries or are facing tricky issues.
The old adage that happy staff make happy customers, which in turn creates happy shareholders is absolutely true. And in light of the changing attitudes surrounding a franchise’s responsibility for the employment practices of its franchisees, this is increasingly becoming something franchisors should involve themselves in.