Written by Workforce editor David Marin-Guzman
The Fair Work Ombudsman (FWO) says lack of compulsory interview powers has hampered its ability to obtain evidence that 7-Eleven head office was “involved” in widespread underpayments. That was despite findings the franchisor had an unusually high degree of control over its franchisees and was on notice about underpayments for six years.
FWO made the comments in its inquiry report released in April, which recommended the franchisor enter into an extensive compliance partnership with the agency and that a whole-of-government response would more effectively prevent the wilful exploitation of visa workers.
The report said FWO had not uncovered evidence of the franchisor’s involvement in underpayment breaches that would satisfy accessorial provision s550, noting the high bar required to prove a party was “knowingly concerned” in a breach.
Under s550 “negligence or recklessness is not enough” and “mere knowledge of general non-compliance or suspicions about compliance will not be sufficient to meet the test”.
The report said its investigations into 7-Eleven had been characterised “by widespread lack of co-operation and creation of records that concealed rather than established contravening conduct”. “In this context evidence obtained can limit our capacity to investigate and establish accessorial liability beyond the direct employer/franchisee level.”
The agency noted that “unlike some regulators” it did not have the capacity to require any person to answer questions on the record about alleged contraventions of workplace laws.
“If we had that capacity, with the accompanying immunity that generally flows to the witness, we would be better equipped to seek evidence from individuals about people and entities who may be involved in identified contraventions by a franchisee.”
7-Eleven failed to act for years: FWO
The report said that since at least 2008 7-Eleven head office had been on notice about significant non-compliance issues by its franchisees but did nothing.
FWO audits in 2009 and litigation in 2010 made it clear that some 7-Eleven stores had engaged in “deliberate attempts to underpay workers”, including through falsifying records. Despite these signs, 7-Eleven did not appear to make major changes, the report said.
In 2012 – the same year 7-Eleven was named “franchise of the year” by the Franchise Council of Australia – FWO invited it to participate in a pilot program to help franchisors and franchisees address compliance. But, despite expressing initial interest and assuring FWO of its commitment, 7-Eleven declined to participate.
In October 2014 FWO provided 7-Eleven with evidence of “widespread compliance risks across the network” and again in May 2015, following an audit of 20 stores where FWO could not be satisfied any were fully compliant.
In a damning statement, FWO Natalie James said the agency had had “significant engagement” with 7-Eleven head office between 2009 and 2014 and had “expected to see improvements in compliance”. “We did not,” James said.
The inquiry found 7-Eleven had “very high levels of control” over its franchisees, including regular reviews, processing payroll, providing training and support to franchisees and employees and having access to stores’ profit and loss statements.
“In a number of ways they are more closely involved in employment-related matters than we have typically encountered with other franchise arrangements,” the report said.
While 7-Eleven franchise agreements guaranteed stores an annual $120k gross income that was less than minimum wage costs, which FWO wage modelling said was likely $160k for a small store.
A 7-Eleven manual to franchisees said wages formed the largest operational cost incurred and that “penalties associated with the underpayment of wages (whether deliberate or accidental) represent one of your greatest areas of risk…”
The inquiry said it formed the impression 7-Eleven expected franchisees to work in their stores, creating “an unrealistic expectation of profit” and resulting in franchisees struggling to pay wages when they were unable to work.
Indeed, the stores found to be paying significantly below award rates were those that didn’t have the franchisee working at the store.
7-Eleven profited off underpayments
7-Eleven told FWO it only acted on employees’ complaints if they agreed to be identified to the franchisee – yet it admitted that covered a significant portion of grievances. Even when 7-Eleven raised an employee issue with a franchisee, emails showed the franchisees did not respond.
The report said employees felt 7-Eleven was either disinterested or aware of high levels of non-compliance but ignored them because it was to their benefit that stores appear profitable.
While noting 7-Eleven had said “[t]he viability of the 7-Eleven system is in no way, never has been and never will be, dependent on franchisees underpaying their staff”, FWO said “it’s clear the significant underpayment of wages has directly benefited 7-Eleven as well as the franchisees”.
FWO concluded “[i]t is our opinion that 7-Eleven had a reasonable basis on which to inquire and to act” and “could have done more, and acted earlier”.
Inference based on hearsay is not evidence: FWO
The report noted it had received information in 2014 from a person claiming to be a district manager alleging 7-Eleven was complicit in falsification of records and coached franchisees to satisfy FWO audits.
“Anecdotal material and hearsay about what ‘people’ within 7-Eleven may have known at particular points in time may support a broad inference that 7-Eleven, or some of its people, knew or suspected that underpayments were occurring,” it said.
“However, an inference based on hearsay or speculation is not evidence.”
Phoenixing and tax remedies needed: FWO
The report said most of the 7-Eleven employees were visa holders, particularly male international students. It noted that as of February 2016, 73% of FWO’s court actions in this financial year were for underpayment for visa workers – that was up from 42% in 2014-15.
On broad reforms to tackle systemic underpayments, James said the “the level of penalties and our limited investigative powers have contributed to this environment [of non-compliance]”.
It said other regulatory frameworks could “more effectively inhibit” rogue employers’ capacity to wilfully exploit vulnerable visa holders.
As an example, it recommended remedies that addressed employment of visa holders in breach of their visa conditions, phoenixing by corporate entities and breach of tax laws.
Admit franchise model contributed to exploitation: FWO
For 7-Eleven itself, it recommended it enter into a compliance partnership where it publicly accepted it had a “moral and ethical responsibility” to require standards of conduct from all franchisees.
Terms to be agreed include:
• Acknowledging its franchise model and administrative processes, including the requirements of its payroll systems and internal audits, have in some instances contributed to an environment where employees have been highly vulnerable to exploitation;
• maintenance of a guarantee reserve fund to cover workers found to be underpaid;
• requiring franchisees to rectify underpayments and for 7-Eleven to make an ex-gratia payment to the employee if the franchisee fails to rectify the underpayment within 30 days;
• outlining the minimum wage costs required to operate the relevant 7-Eleven store and for wage costs to be included in profit and loss statements;
• where profit and loss statements included wage costs below award wage modelling 7-Eleven must refer the store to an external HR specialist for investigation.
7-Eleven says will finalise FWO partnership soon
FWO has been in regular communication with 7-Eleven since September 2015, after ABC’s Four Corners broke the story about the franchise’s systemic underpayments.
A 7-Eleven spokesperson told Workforce Daily it had been negotiating a compliance partnership with FWO since late last year.
“We are hopeful of finalising those negotiations in the very near future.”
In a statement, 7-Eleven chairman Michael Smith said “we have readily and willingly accepted the report because what it advocates is aligned with many reforms that 7-Eleven has already initiated”.
Smith said 7-Eleven had “long believed” the franchise codes had “not kept pace with the changing face of the Industry generally and change is required to ensure they provide clear and appropriate deterrence and sanction mechanisms that drive ethical behaviour”.
He said the challenges it was “overcoming” were “widespread across the Australian IR [industrial relations] landscape”.
“A crucial part of ensuring we succeed in eradicating and preventing activities that deprive individuals of their rights and entitlements and positioning 7-Eleven as an industry leader in reform is a co-operative effort between the company and the FWO.”
Labor undecided on compulsory powers
Labor’s Protecting Workers Rights Bill did not include compulsory powers for FWO. The party itself has criticised compulsory powers that would apply to a restored Australian Building and Construction Commission.
A spokesperson for shadow employment minister Brendan O’Connor said “Labor is prepared to consider the FWO’s views about whether its powers are sufficient”.
“But extending coercive powers to the civil jurisdiction must be justified and balanced with appropriate protections, unlike those the government wants to give to the ABCC.”
(This story first ran in Workforce Daily, 11 April 2016)
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