Franchisors Beware- Government Targets Friends With Benefits
Most of us donât want to see the wage entitlements of vulnerable employees being short-changed by their hegemonic employers. Recent evidence of employee exploitations by 7-Eleven, Caltex and Yogurberry franchisees has created a feeding frenzy for mainstream media and impelled Government to propose new laws that make franchisors responsible for franchiseesâ non-compliance of workplace laws. Could this be the end of âFriends with Benefitsâ in franchising?
Hit the pause button for a minute and letâs unpack this proposal. What is the real problem? What are we solving? Is it a moral, ethical, commercial, social, political or legal issue or a combination of or all the above?
Who or what is being protected here and for what reason? If Government wants to protect employees from employers, then isnât this the role of Fair Work Australia and workplace laws. In fact, in Australia a franchisor may be subject to accessorial liability under section 550 of the Fair Work Act for aiding, abetting, counselling, procuring or inducing a contravention of the FWA. Most recently The Federal Court found the franchisor of Yogurberry guilty of being an accessory to the exploitation of several employees by its franchisees. Given this existing legislation has now been applied in a franchising context do we really need more laws that purport to achieve the same thing?
If Government ratifies new laws to protect vulnerable employees from their employers, by making franchisors jointly liable for their employerâs (franchisees) actions then where does the intervention stop?
Should Government also leap to the succour of other vulnerable groups such as ma & pa businesses who lose out when a creditor franchisee goes bust, or when elderly consumers are duped at the sales counter or unsuspecting visitors fall head over heels on a slippery showroom floor?
For example, should a franchisor be responsible for (1) a franchisee who trades whilst insolvent or (2) a franchisee who misrepresents an offer or (3) fails to observe proper OH&S practices? Surely not! These infractions can and are effectively dealt with under existing Corporations, Consumer and OH & S laws. Do we need another layer of prescriptive conduct and regulations for franchising arrangements? Or do we need to substitute regulatory nostrums for more non-regulatory measures that incentivise both franchisee and franchisor to observe their reciprocal moral, ethical, social, and commercial obligations?
Many would argue the reciprocity of these obligations, the operation of businesses through separate legal entities and the perception of operating and minding oneâs own business form the bedrock of successful franchising. Operating as friends-with-benefits is unique to franchising. Franchisor and franchisee enjoy the separation of ownership and custodianship, while agreeing to hook up for benefits. The rules to this union are mutually agreed and represented in the franchise contract. Any tampering with this fundamental right to structure the way benefits are operationalised may backfire- it may turn friends into foe rather than bolster the relationship.
Admittedly, the codification of franchising has already signalled the preparedness of the Australian Government to intervene in freedom to contract. Unlike the proposed âjoint liability for employee entitlementâ laws, the mandatory Franchising Code of Conduct applies to parties to the franchise contract i.e. franchisees and franchisors. The proposed laws seek to create obligations for a franchisor for a contractual arrangement between two unrelated parties- the franchisee and their employees. This will be rejected by most franchisors. And it is the legal independence of franchisee and franchisor that powers many of the financial, commercial and relational benefits of the relationship.
Despite this anomaly, it appears that similar moves are afoot in the USA with the National Labor Relations Board (NLRB) seeking to hold McDonaldâs USA liable as ‘joint employerâ for alleged labour law violations by franchisees. In fact, some franchisors in the USA are now scrambling to avoid being labelled joint employers by reducing the HR support to franchisees and distancing themselves from this proven structural pillar of franchise support. Decreasing centralised HR training and support will shift the function and cost to franchisees.
If this seismic shift of employment responsibility were to occur in Australia it would shake the foundations of franchising and potentially cause the following after-shocks:
- Increase in monitoring costs.
- Expose various operatives in the franchisorâs business (from Directors to field operators to the junior bookkeeper) to prosecution based of what non-compliance knowledge they had, when they had it and how it was obtained.
- Create a new set of complex obligations that will further complicate the franchise structure and the franchise agreement.
- Reduce the return-on-investment for franchisors as compliance costs rise. This may result in a shift of these costs to franchisees thereby reducing their returns and the resale value of their businesses.
- Knowing that franchisors are jointly responsible, franchisees might free-ride and become complacent towards compliance.
While the new law proposes prescriptive measures, which carry sanctions., we prefer a system that encourages and rewards collaboration between franchisee and franchisor in observing their respective compliance obligations- under Workplace laws, Corporations Law, Taxation Law etc. Given the commercial interdependence of franchisor and franchisee, recurring unlawful conduct by either party ultimately degrades the value of the brand and any goodwill attached to it. Accepting that both franchisor and franchisee depend on the brandâs equity for income and capital growth, franchisors could be encouraged to include a reward model in their franchise agreement that allows franchisees to benefit from appreciations in the goodwill value of the brand and the goodwill of their respective franchise on exit such as an assignment, a surrender, a closure, or a resale)⊠unlike their US counterparts, most Australian franchisors do not recognise franchisee entitlement to goodwill.
Dr Maurice Roussety is a Consulting Strategist for DST Advisory and Lecturer in Small Business, Franchising and Entrepreneurship at Griffith University in Queensland, Australia. He has worked with leading organisations such as Queensland Transport, IAG, Westpac, Australia Post, Coles Myer, Red Rooster, Commonwealth Bank, ACCC, and Optus. Maurice holds a PhD in Intellectual Property and Franchise Goodwill Valuation. He also holds a Masterâs degree in Leadership and in Business Administration. He is available for consulting and public speaking engagements and can be contacted further at maurice@dstadvisory.com or you can visit him at www.mauriceroussety.com.au
