Franchisee underpayments and the supply chain

Stephen Booth

I do not recall worker underpayments ever having been an election issue before, or even rating a policy announcement but this year, under the media spotlight ignited by 7-Eleven, this issue is now very much on the agenda. This is part of a trajectory of heightened enforcement activity and a broader view of who might be liable for pay infringements.

Employers not complying with award minimum wages, or trying to avoid awards by sham contracting, is not a new issue. In the old days, pre-Workchoices in 2006, the Department of Industrial Relations in each state had inspectors to investigate and prosecute underpayments but it was pretty low key, and had not been given a shake up for a long time. With Workchoices and the Fair Work Act, and the shift of responsibility to the Federal Government, came a much higher-profile regulator, in the form of the Fair Work Ombudsman (FWO) which had a more sophisticated approach to enforcement (drawing on the likes of the ACCC), including savvy use of the media to spread the word.

So, when the 7-Eleven issues became public knowledge, the FWO was the responsible regulator. In order to minimise the prospects of an aggressive approach from the FWO, 7-Eleven appointed its own independent panel, headed by Professor Allan Fels, to deal actively with the claims of employees of its franchisees who had been underpaid. In many cases the workers were recent migrants or on student visas with poor English and no resources, and were vulnerable to threats to report them to Immigration, so that they may be detained or deported, if they complained. It was reported that some franchisees paid the right money on the books, so that the records looked OK, but then forced the employees to pay back up to half of their pay in cash.

Among the issues this raised was the point that 7-Eleven’s business model gave franchisees a very small margin, so that franchisees were under pressure to squeeze pay in order to make a dollar. So while 7-Eleven wasn’t directly responsible for the employee underpayments, it was responsible for the structure within which underpayments happened, and for not acting to ensure franchisees met their legal obligations.

During May, 7-Eleven dispensed with its panel and internalised its claims assessment process. Professor Fels has noted that this occurred after the independent panel had served 7-Eleven’s purpose as window dressing for the Senate enquiry into this issue, and that the main point of difference between 7-Eleven and the panel was that 7-Eleven wanted to insist on strict legal proof of entitlements while the panel took a broader view, given the vulnerability of the employees and the lack of full records and evidence - because of the franchisees’ conduct - to enable cases to be strictly proved.

In response, the Turnbull Government has promised that if it is re-elected, it will appoint Professor Fels to a Migrant Worker Taskforce within the FWO, with an extra $20m in funding, and with franchisors being made directly legally responsible for underpayments to franchisee’s employees. The ALP has also promised to stiffen penalties, and to focus on sham contracting.  

The role of the Taskforce will be to pursue exactly the issues which have come up at 7-Eleven – and elsewhere. Where is “elsewhere”? It extends well beyond franchising:

Recent media coverage has also included Myer’s cleaners and Coles and Woolworths’ trolley collectors. Note that Coles has received kudos for a proactive approach to prevent underpayments down the supply chain, once the issue was raised.

The media focus on big players like this is enforcement activity in itself because public pressure may do more, more quickly, than legal action. These high profile cases also serve as education for everyone else - and the message that people up the chain can be legally liable for being knowingly involved in the exploitation of workers at the bottom of the chain, or via the proposed legislation to bring franchisors directly into the loop, is a new element in this issue which goes a step beyond the traditional legal approach.

Whatever the outcome of the election, it seems that this is an issue with some way to run yet, with a more-or-less bipartisan commitment to do more to protect vulnerable employees. Prudent businesses will make sure that suppliers of goods and services over whom they have some influence are doing the right thing, and take responsibility where evidence of underpayments emerges.  

If you think there may be an underpayment issue affecting your business, contact our Employment Law team:

Stephen Booth, Principal
Phone: +61 2 9895 9222

* See a more positive note in a recent piece, 'Why you should pay staff properly’ in the Sydney Morning Herald’s My Small Business section, including comments from Coleman Greig.


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