7-Eleven Stores is finalising details for a compliance partnership with the Fair Work Ombudsman as a crucial plank in restoring the integrity of the franchise system following the revelations last year of the exploitation of employees with student visas.
The highly decorated franchise system was left reeling when the extent of the underpayment of staff, the abuse of visa conditions and the manipulation of financial records by a large number of franchises was uncovered last year.
The revelations forced the resignations of chairman, Russell Withers, and CEO, Warren Wilmot, and have left 7-Eleven Stores exposed to a compensation bill to around 2000 underpaid staff identified to date of up to $100 million.
The company has also racked up further costs in settlements, with some franchisees seeking to quit the system, and has been forced to amend franchise agreements and restructure fees in concession to its retailers, who argued that they could not operate profitably under the previous fees structure.
Some franchisees claimed the underpayment of staff was a direct result of onerous franchise agreements that provided for 57 per cent of gross profits to go to the franchisor and 43 per cent to the retailer.
A Fair Work Ombudsman investigation has confirmed that financial stress under the 7-Eleven Stores franchise agreements was a key issue in the wages scandal.
In fact, 138 of the 620 franchise stores made $300,000 or less in income in 2015, which was not sufficient to meet store operating costs, including award wages.After initially stoutly defending the viability of the fee structure, 7-Eleven Stores announced a new three-tier fee structure last October in an effective concession that the system had major problems that had led to poor operating standards and the wages manipulation.
The new fee structure announced in October provides for franchisees with annual gross profit under $500,000 to share profits on an equal basis with the franchisor, with stores bringing in a gross profit above $500,000 but below $1 million retaining 47 per cent and the franchisor 53 per cent, and stores earning more than $1 million splitting profits 56 per cent – 44 per cent in favour of the franchisor.
The franchisor pays rent and utilities out of its share of profits on each store, with the franchisee paying from their share for payroll, store supplies, cleaning and phone expenses. The new agreement on profit splitting was designed to head off legal action by a group of franchisees, as well as to stabilise the network by improving the profitability of stores to ensure they did not cut corners on wages in future.
Aiming to satisfy regulator agencies about governance and compliance with workplace laws and other corporate standards and to repair reputational damage to the brand, 7-Eleven Stores has developed a strategic reform program that it concedes will result in changes to franchise codes.
In fact, Michael Smith, who took over as chairman from founder and majority shareholder, Russell Withers, when the wages scandal erupted, said it is crucial that 7-Eleven’s reforms roll out into the franchise industry as a whole if it is to continue to grow and have the on-going support, confidence and goodwill of customers and the community. Smith might well have added the reforms will be crucial if the franchise sector is to keep further regulation at bay with a Senate Committee Inquiry into the 7-Eleven wages scandal proposing that franchisors assume a responsibility for compliance with awards and employee entitlements where franchisees fail to meet their obligations as employers.
Fall from grace
7-Eleven is one of the largest and longest established retail franchise systems in Australia and has been regarded as one of the best-run systems, collecting awards and kudos over decades. Inside Retail Weekly has long argued that the margins in retail franchising are wafer thin and have curbed the growth of the sector and undermined the profitability of both franchisors and franchisees alike.
Cost issues as much as flat economic conditions have contributed to a significant consolidation in the franchise sector in the past five years, with a number of larger multi-brand systems acquiring smaller systems.
Ahead of the release of the Fair Work Ombudsman investigation into the 7-Eleven wages debacle, the franchisor established a panel chaired by Professor Alan Fels, the former chairman of the Australian Competition and Consumer Commission, to assess employee claims for underpayment of wages and entitlements and to advise on compensation to franchisees keen to exit the system.
More than $10 million has already been awarded in back pay to around 300 workers, but more than 2000 underpaid past and current workers have been identified, indicating the settlement cost is likely to be close to, or event to exceed, $100 million. 7-Eleven could still face penalties for its failure to address the underpayment of employees by its retailers and to effectively turn a blind eye to the problem.
However, the company is relying on negotiating agreements with the Fair Work Ombudsman going forward that would provide court enforceable undertakings and agreed compliance measures that will include a mandatory centralised payroll system for retailers and store audits.
7-Eleven Stores has also appointed a specialist investigator tasked with undertaking inquiries into any suspected breaches of workplace obligations, so the company is in a position to act as quickly as possible in cases where breaches have clearly occurred.
Driving changes at 7-Eleven Stores is Angus McKay who was appointed as the new CEO in March, taking over the role from interim CEO, Bob Bailey, who is a director of the convenience chain’s board.
McKay was most recently the CEO and MD of Skilled Group and was recruited after a global recruitment search to advance 7-Eleven’s strategic reform program, which is focused on growing the business, which last year began to expand its store network outside of the eastern seaboard.
Chairman Smith said McKay is also charged with improving operations and enhancing people and culture to ensure the company has, “21st Century workplaces that are fair, efficient and customer focused”.
Taking up the position last month, McKay pledged to develop a strong relationship with franchisees, many of whom have been alienated by the scandal itself and early attempts by 7-Eleven Stores to blame store owners and avoid any responsibility for the underpayment of employees.
7-Eleven supports findings
7-Eleven Stores has welcomed the release of a report by the Fair Work Ombudsman on the wages scandal, with McKay indicating the company accepted the findings in full. McKay said the company was prepared to make further changes in its governance and compliance processes and operational policies based on further consideration of the Fairwork Ombudsman’s findings.
The Fair Work Ombudsman said a range of public policy settings has contributed to the compliance failures in the 7-Eleven franchise system, a finding that is likely to prompt the Senate Committee Inquiry that investigated the wages scandal to review and possibly extend their recommendations.
Certainly Prof Fels is arguing that the Fair Work Ombudsman lacks the teeth of other regulatory agencies to pursue employers who fail to comply with workplace laws and who face inadequate penalties when non-compliance is detected.
Contributing to the 7-Eleven non-compliance issues, the Fair Work Ombudsman were jurisdiction areas of other regulatory frameworks, such as corporations law, immigration settings, competition and tax laws. The report said the exploitation of visa-holders working in Australia has long been a priority for the agency, but under current settings it is unlikely to be able to eliminate serious and deliberate manipulation of visa-holders across multiple regulatory frameworks.
The Inquiry believes that other frameworks offer up potential opportunities and remedies that, if harnessed by government and other stakeholders, could more effectively inhibit the capacity of rogue players to wilfully exploit vulnerable visa-holders. The Fair Work Ombudsman inquiry recommended that 7-Eleven enters into a compliance partnership with the agency, accepting that it has moral and ethical responsibility to ensure its stores meet community and social expectations for equal, safe and fair work opportunities for all employees.
It further recommended the implementation of effective governance arrangements that ensure compliance with all federal workplace laws and a review of its operating model to ensure regular review of the financial viability and legal exposure of franchise agreements and engage an external, independent party to self-audit its compliance.
The Fair Work Ombudsman also said the retailer should set up a staff consultative forum with employee representatives from across the network that is separate from franchisees. McKay said the agency report gave the company confidence that, “we are on the right track with our reforms and the commitment to continuous improvement across our entire business, including the relationships with our franchisees, and the need to reform the Franchise Codes”.
“7-Eleven has long believed the codes have 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,” McKay said. “Significant progress has been made in respect to governance and compliance across our network of stores. “7-Eleven is entrenching as a matter of principle a culture of continuous improvement, which recognises the ever-changing nature of the industrial landscape and the need to be ever-vigilant when it comes to upholding workplace rights and entitlements,” McKay said.
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