Setting off a chain reaction

7-Eleven-convenience-store-frontThe Franchise Council of Australia’s (FCA) appointment of former small business minister, Bruce Billson, as executive chairman was a clever move, but is unlikely to sway the Federal Government on its proposed new law to protect vulnerable workers.

Billson was outstanding as the small business minister, highly regarded by his colleagues and will provide sound leadership and positive representation for the FCA. However, he is facing an uphill battle to persuade the Federal Government or any of the other parties in the Parliament to back off on the landmark legislation as revelations of the exploitation of employees in the franchise sector continue to emerge.

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The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 is one of several highly charged political issues in an industrial relations battleground that has intensified with the FWC (FWC) penalty rates decision and the cancellation of the 457 visas.

The penalty rates decision by the FWC was a balanced one, evidenced by the fact that no-one was really satisfied, but it has landed the Turnbull Government in maelstrom and defending a decision by the independent umpire with little support by the employers who stand to benefit.

The penalty rates decision has given impetus to Labor Opposition Leader, Bill Shorten, who is strenuously trying to revive the ghost of WorkChoices to portray the Turnbull Government as anti-worker.

The cuts to penalty rates by the FWC were measured but they do create a serious political problem for the Federal Government.

No-one likes to see their wages cut at any time, but with prevailing high levels of unemployment and underemployment, every dollar for employees is critically important to employees today.

The FWC has asked for views on how its decision could be fairly implemented and, no doubt, the Turnbull Government is also mulling over a political solution. Grandfathering has been mentioned, a process that would allow current employees to escape a pay cut, applying the new penalty rates to new employees.

With the churn rate in many retail businesses, grandfathering could be a viable option except for the fact that it might result in manipulation by some employers.

The temptation to dismiss a current employee and hire a new one at the cheaper rate would be tantalising to some employers, sadly, evidenced by recent revelations, many of those employers in retail franchise systems.

If the exploitation of workers by some very prominent franchise systems hasn’t been enough to make the Federal Government wary of any concessions to Billson and the FCA, it is worth wondering why highly automated fast food operations needed to use 457 visas to import staff for their restaurants.

No doubt the evidence of fast food chains such as McDonalds, KFC and Hungry Jacks had recruited around 500 staff on 457 visas played into the Turnbull Government’s review and tightening of the scheme this month.

With the fallout from the penalty rates decision, the abuse of the 457 visas by some employers and unemployment and underemployment levels much higher than the official statistics state, the Turnbull Government cannot afford to compromise on systemic and deliberate breaches of workplace laws.

Pizza HutThe FCA claims the franchising sector has more than 79,000 franchised businesses and an annual turnover of $144 billion and it certainly has some very large players. The problem is that it is some of those large players that have been involved in short changing employees on wages and entitlements, franchise systems like 7-Eleven, Domino’s Pizza, Pizza Hut, Caltex and United Petroleum.

If the breaches of workplace laws were all by small franchise systems or independent retailers, the Turnbull Government might have been able to agree to Billson’s pleas for changes to the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017.

Billson argues that the franchising model is a great way for enterprising men and women to get into their own business but not be on their own. He claims franchising works at its best when there is a shared purpose between franchisors and franchisees.

A flawed system

The senators who investigated the 7-Eleven wages scandal involving exploitation of workers on student visas and the FWC would agree that point with Billson. However, they would also no doubt claim franchising works best when there is a shared responsibility.

Billson might also want to reflect on the high level of disputes and franchisee frustration in many of the retail franchise systems. Franchisees who have been found to be breaching workplace laws and underpaying staff invariably claim that they were forced to take shortcuts to survive.

7-Eleven was forced to acknowledge that its franchise system was seriously flawed and had to restructure its financial model after it became evident that a profit share formula was a factor in the systemic breaches of workplace laws by its franchisees.

Franchisees were effectively cutting corners on wages to survive. Franchise systems have not been without their successes, but there are real questions about the viability of the business model in the retail sector.

The initial investment and the overheads of a lawn mowing or puppy washing business are dramatically different to the upfront and ongoing costs of a retail store. The hours involved in running a retail business are longer than for service franchises, the staffing requirements are higher, inventory costs are significantly greater and the rent and occupancy costs squeeze margins – and then there are the franchise levies to pay!

Arguably, the best chance of success in a retail franchise is in food with high customer traffic, relatively low inventory and reasonable margins.

A change of bill

In any event, retail franchises are the most problematic in terms of scale for the Fair Work Ombudsman in respect of systemic breaches of workplace laws.

dominos-cheltenhamBillson has acknowledged the damage to the franchising sector resulting from the 7-Eleven and Domino’s breaches of workplace laws and says the FCA is focused on developing best practice by its members.

Again the problem is that some of the leading figures in the industry and award winners came from major franchise systems that have been embroiled in FWC investigations.

The final call on penalty rate cuts and the 457 visa changes are issues the FCA might have contested are not as important as the vulnerable workers provisions to be added to the Fair Work Act that would make franchisors accountable where franchisees breach employer obligations under workplace laws.

Billson is lobbying Members of Parliament for changes to the bill that is before the Parliament that hold franchisors responsible for a franchisee’s violations in circumstances where the franchisor has significant control or influence over them, or knew or should have known about underpayments, or failed to take reasonable steps to prevent the violations.

Ambitiously, flying in the face of FWC investigations and a Senate Inquiry into the exploitation of workers, the FCA has encouraged some of the companies associated with the worst examples of underpayment of employees to lobby MPs to demand amendments to the legislation.

Billson has argued that the risk of worker underpayment exists across the economy and that the franchising sector should not be singled out and made liable for transgressions of franchisees. He believes that the legislation would have significant consequences, slowing investment and employment in the franchising sector and putting some systems at risk of collapse through no direct action of the franchisor.

If the legislation retains the franchisor liability provisions, the FCA wants courts and regulators to be explicitly forced to take the size of a business and resources into account when deliberating on any matters.

That proposal seems a bit rich in that it is essentially arguing that a small franchise system should face the full force of the laws, while the bigger systems such as 7-Eleven, Caltex, United Petroleum and Domino’s Pizza should be able to claim ignorance of systemic abuses of laws because they are too big to know.

The claim actually lends credence to the claims of many franchisees within those systems that their business models are flawed and the retail support provided by the franchisor is inadequate.

Despite the legislation not being included on Parliament’s business program in the last sitting week, the Government is adamant the bill will proceed and it would seem Labor and the crossbenchers are not in a mood to oppose or amend it in respect of the issue on which the FCA is fighting.

In fact, it is highly likely that the Opposition, Greens and crossbenchers in the Senate would vote to re-insert the provisions, holding franchisors liable for breaches of workplace laws if the Government attempted to remove them.

The FCA is arguing that the current laws are effective in addressing breaches of workplace laws, but that view has not been shared by Senators who examined the 7-Eleven scandal or the FWC, which has recently added the United Petroleum fuel and convenience store network to its list of franchise systems that have shortchanged their employees.

Natalie Jones, the Fair Work Ombudsman told the Senate Education and Employment Legislation Committee Inquiry into the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 her agency supported the legislation.

Jones said the proposed law change would “significantly enhance” the Fair Work Ombudsman’s capacity to take effective action in the most serious and deliberate cases of worker exploitation.

A betting man would be unlikely to favour the chances of Billson and the FCA derailing or significantly altering the bill now before Parliament.

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