The Chatime scandal is the latest to hit the $170 billion franchising sector and follows a damning parliamentary report into the industry. That report said the current regulatory environment had “manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance”.
Labor has committed to setting up a taskforce to examine the recommendations while the government is yet to release a response.
An internal audit of more than 20 stores took place more than six months after Chatime’s head office had introduced a new payroll system to the franchise network to ensure workers were being paid the legal rate.
Part of the explanation, say insiders, is greed, in some cases it is desperation.
The average franchise costs $300,000 for a five-year-contract.
The business model is based on franchisees growing sales, not profit, with head office taking a 6 per cent royalty from every sale as Australians slurp on a growing variety of bubble tea. Outgoings include rent, wages, royalties, 3.5 per cent to a marketing fund, payroll system fees, music and mystery shopper costs, cups, syrup, tea leaves, pearls and toppings sourced from the franchisor and refurbishment costs of up to $150,000.
Deepak Shankar, a lawyer at Litigation Specialists, who specialises in the franchise sector, examined a Chatime disclosure document. He found it lacked enough detail to make an informed decision before purchase. “The aim of a disclosure document is to assist a potential franchisee to decide whether to buy the franchise,” he said. “The Chatime disclosure document, like others in the franchise industry, is so wide-ranging, vague and opaque that it can in no way assist in understanding the expenses involved when operating the franchise.”
Chatime declined to answer a series of questions, including about an investigation by the ombudsman into corporate stores owned by head office. In a statement it said it recognised underpayments were a serious issue in the franchise industry. It said it was committed to paying people correctly and if underpayments were identified, it was committed to rectifying them.
It said in the past some of its business systems and payroll capabilities had not kept pace with the rapid growth of the Chatime brand in Australia and the complexities of the Australian regulatory environment. It said it had taken proactive steps to get it right.
Last month the ombudsman took legal action in the Federal Circuit Court against a former Chatime franchisee in Sydney, alleging it underpaid 17 staff – mostly international students on visas – $46,000 between January and November 2017.
The ombudsman said it was part of a wider investigation into other bubble tea operators, including GongCha, which has more than 55 stores in Australia, and smaller operator Sharetea.
Leaked documents show the ombudsman has audited a number of franchisees across the country.
In 2016 Chatime hired an external workplace relations company to conduct a series of store audits, which uncovered underpayment issues. In a document in February 2017 it said: “The findings of the audit to date highlighted concerningly high levels of non compliance matters which potentially is systemic through the franchise network.”
One audit document describes the franchisee as failing to have any procedures in place to record time worked by staff. One audit of 10 staff notes “significant underpayment of staff during audit period”. It says the franchisee pays staff by cash. “There is therefore essentially no paper trail evidence to show that staff have been paid (no payslips, no bank account statements showing deposits.” It says all workers were foreign and the franchisee has an unsatisfactory system for identifying and monitoring visa workers’ rights.
Another store audit in Melbourne conducted in December 2016, covering nine staff, found payslips did not include employees’ super funds and that staff were not given proper paid breaks. All workers were foreign, yet there was no system of identifying and monitoring visa working conditions. The audit found the “franchisee does not have a satisfactory procedure for recording time actually worked by staff”.
Anonymous online employer ratings website forum Glassdoor includes posts written by anonymous workers, some complaining of underpayment at Chatime franchised stores. One former worker described the franchisee as unprofessional and suffocating. “Imagine working with Gordon Ramsay, but he doesn’t do anything Gordon Ramsay does other than swearing and publicly humiliating you. Then combine that thought with Kevin Spacey from Horrible Bosses, that is what Chatime management is… Fake superannuation accounts, hires you as part-time but without the benefits until Fair Work is on them.”
Adele Ferguson comments on companies, markets and the economy.