Why franchises care more about their coffee than their people

The systematic exploitation and non-compliance with legal obligations highlighted by this week’s Four Corners program is not typical across all franchises.

While a recent enforcement campaign by the Fair Work Ombudsman suggested 60% of 7-Eleven outlets engaged in non-compliant practices such as staff underpayment, its campaigns in other heavily franchised industries such as hospitality typically report non-compliance by around 30% of employers.

Still, even that is a worrying level of non-compliance. There is a structural aspect of the franchise model that encourages this.

The 7-Eleven business model in Australia requires 57% of gross profit to be returned to the franchisor head office. This week’s report argued this makes doing business legally almost impossible.

International students bear the consequences. Many are trapped by practices such as the “half-pay scam” where employees are paid for only half the number of hours worked each week (in effect, working for only half the hourly award rate), under threat of having their visa cancelled if they disclose.

A matter of accountability

We recently studied the limited existing research on management of industrial relations (IR) in franchises. We found that diverse accountability of franchisors (head offices) and franchisees (outlets) explained differences between franchisor control over products and their control over labour processes.

On one hand, the franchisor is accountable to the customer for ensuring quality of the product. If the customer is unhappy with the product (say, a coffee) from any individual outlet, they may stop buying from that or any other outlet in that franchise. So typically, franchisors tightly direct and audit product-related processes, such as those applying to suppliers and health regulations.

On the other hand, the franchisor is not accountable to outlet employees. It’s the franchisee who is accountable for ensuring compliance with legal obligations. So the outlet owners, not head office, are investigated and fined for indiscretions.

This suits the franchisors quite well. They can mix the benefits of large businesses’ access to markets, marketing, pricing and control, with the low labour costs (not always legitimately) of small businesses. If breaches are found, they can say “it is extremely disappointing that franchisees have chosen to not meet their employer obligations”. It provides plausible deniability.

This is not to deny that franchisors often support franchisees. Some audit behaviour, provide seminars and workshops, develop wage determination tools and respond to queries from franchisees and their employees. But their involvement varies, partly because franchisors may fear misinformation about pay or penalty rates could shift liability onto themselves.

Who doesn’t comply with their obligations?

Generally, we know that small businesses are more likely than large businesses to breach labour standards, pay lower wages and to have no human resource management or union presence.

While most franchise outlets can be classified as a small business, they do not operate independently. They are influenced and controlled by a larger head office organisation.

A US report by David Weil conducted from 2012 suggested franchised businesses had better industrial relations compliance rates than comparable independent small businesses. Yes, support from franchisors makes a difference.

While Australia doesn’t have research of the same standard, a 2010 report by the Fair Work Ombudsman found employers that received industrial relations support from their franchisor were more likely to abide by the law than other employers. Large and small franchises offered different levels of support. As franchises mature, franchisor control over key processes in outlets tends to increase. But this doesn’t always extend to IR.

Franchisor involvement

Just as large, well-established organisations normally show high franchisor control, so did 7-Eleven. It reportedly even centrally maintained the temperature of individual outlets. The company’s statement of August 13 said it conducted audits of outlets. However, the high rates of franchisee non-compliance reported by the Fair Work Ombudsman raises doubts about how deeply these audits dug into employment practices.

The 7-Eleven statement said if employees contacted head office with concerns of non-compliance, they were advised to speak to their employer or the Fair Work Ombudsman. For vulnerable international students, caught in the trap of working more than their maximum allowable hours but not being adequately paid for them, that’s not very helpful.

The scale of the breaches, a recording of a franchise agent saying “nobody pays their staff full wage, man”, and revelations from within, all make plausible deniability implausible.

The response by 7-Eleven to the unfolding saga among franchisees is also unlikely to be helpful for the company’s reputation, which could well suffer lasting damage.

Other franchisors are likely to ask themselves, “are we vulnerable, too?” A business model based on diverse accountabilities and plausible deniability may not be sustainable. This is particularly so if the firms do not give the same attention to ensuring compliance with awards and legal agreements as they give to making sure the coffee machines and muffins are up to scratch.

Adrian Wilkinson receives funding from the ARC

As a university employee, David Peetz has undertaken research over many years with occasional financial support from the Australian Research Council, governments or government organisations organisations from both sides of politics in Australia and overseas, employers and unions for specific projects. Those funded projects do not concern the subject matter of this article.

Keith Townsend receives funding from the Australian Reseach Council and various state government departments throughout Australia.

Ashlea Kellner does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.