The report will pile pressure on an already embattled sector coming just a week after a landmark report by the Migrant Workers Taskforce, spearheaded by Allan Fels into underpayment of wages found that wage fraud was widespread and had become more entrenched over time. The government responded with promises of substantial reform including the prospect of criminal penalties for employers who do the wrong thing.
The migrant workers report and parliamentary report into franchising were sparked by a spate of scandals exposed by The Age and Sydney Morning Herald featuring well known franchise groups 7-Eleven, Domino’s Pizza, Caltex and Retail Food Group (whose brands include Michel’s Patisserie, Brumby’s, Gloria Jeans, Donut King and Crust Pizza).
The reason is simple: underpayment of workers and the franchise sector are interconnected.
Wage fraud in the sector is often a consequence of crushing franchise business models characterised by high fees, royalties, rebates and draconian refurbishment costs.
These models pour money into the franchisor’s pockets but push franchisees to cut corners including ripping off workers to remain afloat.
In some franchise outfits, franchisees have to pay royalties and marketing fees that can add up to 10 per cent or more of sales.
Some franchisees have to source most of their products from the franchisor which is often more expensive than if they bought them elsewhere. This can include basics such as milk and flour.
It has added up to be a big problem, not just in terms of underpaying workers but the number of franchisees left destitute having bought the dream of running their own business.
Over the years, there have been a number of inquiries into the franchise sector, but none have addressed the basic problem of a severe power imbalance between the franchisor and franchisee which can, and does, get abused. Under the current system there is little avenue for redress.
There is a franchising code of conduct and the Australian Competition and Consumer Commission is the regulator, both need addressing.
Since the parliamentary inquiry was launched last year hundreds of submissions have poured in, outlining some harrowing stories.
In one submission, a group of Croc’s Playcentres franchisees wrote about a culture of “bullying, misogyny and cronyism”. Croc’s denied the claims.
Two former Pizza Hut franchisees illustrated the human cost of a franchisor changing the rules and forcing the network of small business franchisees to sell pizzas at below cost, at $4.95.
One of the Pizza Hut franchisees, Chris Hackett, said the $4.95 pizzas resulted in him working 100 hours a week for as little as $3.50 an hour.
Another former Pizza Hut franchisee Adam Gordon described the decision as a “transfer of wealth”. He worked 80 hours a week without pay. He eventually sold at a loss. Gordon contacted the ACCC and was told it couldn’t help him.
Up to 90 per cent of Pizza Hut franchisees turned to the courts to take the franchisor to court alleging unconscionable conduct, which resulted in losses and business collapses. They took the case right up to the High Court and lost, showing how tough it can be to take on the franchisors.
Forcing franchisees to sell products at below cost should be outlawed. The only winners are the franchisor, who collects fees from the extra sales and extra rebates from the ingredients sold.
It is why the report needs to look at overhauling the franchising code, renovating unfair contract terms and beefing up the powers of the regulator to help redress the imbalance.
The report is also expected to address car dealership franchisees, which is a big sector and has argued that the franchise code is inadequate.
The Victorian Automobile Chamber of Commerce, which represents members that conduct their business through franchise arrangements including sales of cars and motorbikes, commercial vehicles, repairs and farm machinery said current franchise agreements had the scope to “impose unilateral unreasonable terms on a take-it-or-leave-it basis that forces the franchisee to accept unreasonable terms”.
The report will include numerous recommendations. The big question is how far it will go and then what the lobby groups do to water it down.
Adele Ferguson comments on companies, markets and the economy.