Franchising – all care and no responsibility

Who’s watching? Richy!/Flickr, CC BY-NC

When a number of senior managers of the beleaguered 7-Eleven franchise chain appeared before a Senate committee last month, they blamed the Franchising Code of Conduct for their apparent lack of action in response to the unlawful behaviour of franchisee operators.

According to Natalie Dalbo, the former General Manager of Operations of 7-Eleven Stores Pty Ltd, the Franchising Code would make it “nearly impossible” for head office to terminate the relevant franchise agreement, even where franchisees had knowingly underpaid workers and deliberately falsified employment records.

While these assertions are somewhat debatable, it’s generally true that, under the Franchising Code, head franchisors may only terminate the franchise agreement without notice in so-called “special circumstances”.

Such circumstances do not currently include contraventions of workplace laws. Indeed, Professor Allan Fels – the former head of the Australian Competition and Consumer Commission (ACCC) and the chair of the independent panel established by 7-Eleven to process claims of underpayment – has argued that there may be a need to tighten up provisions of the Franchising Code to better address the types of illegal behaviour identified in the 7-Eleven case.

How it works now

Under the typical franchise arrangement, the head franchisor – the company which holds the brand name and sits at the apex of the franchise structure – is not normally responsible for employment-related entitlements and liabilities.

While the franchisor and franchisee share a common brand, it is generally the independent franchisee business which directly employs individual store workers.

The contractual disconnect between the head franchisor and the employees working within the franchise network is often perceived as a significant advantage of the dominant franchising model. This model enables the head franchisor to expand the franchise business and grow the brand while remaining largely insulated from legal risks and liabilities incurred by its franchisees under workplace laws.

Another important aspect of the hierarchical franchising model is that the head franchisor continues to assume a relatively commanding position vis-à-vis their franchisees. The strategic position of head franchisors means they often exercise varying degrees of formal and informal control over the business practices of their franchisees.

The federal Competition and Consumer Act recognises that head franchisors are in a uniquely powerful market position. In a bid to curb potential abuses of this power, the dealings between franchisors and franchisees are subject to the Franchising Code -– a mandatory industry code administered by the ACCC. As noted above, the Franchising Code restricts the circumstances in which a franchise agreement may be terminated. It also requires franchisors to deal with franchisees in good faith. More generally, the franchisor is prohibited from engaging in unconscionable conduct towards its franchisees under the Australian Consumer Law.

But this is where things start to get complicated: where the worlds of workplace and competition regulation begin to collide. On the one hand, a clear way to protect workers from exploitation is to allow head franchisors to terminate the franchise agreement where serious contraventions of workplace laws have occurred or are likely. Indeed, we have recently seen the head office of 7-Eleven do just that, albeit on a somewhat belated basis. These types of commercial sanctions are often far more powerful than legal penalties in terms of driving long-term behavioural change among potentially wayward franchisees.

On the other hand, and from a competition perspective, it is critical to ensure that head franchisors do not wield their termination powers unfairly - particularly where it is the franchisor’s business model which may have contributed to the franchisees’ concerning compliance behaviour in the first place.

How can it work better?

Strengthening the termination rights of franchisors by amending the Franchising Code is one way to ensure that franchisors can promptly halt franchisee misconduct and prevent further worker harm. But with greater power must come greater responsibility. Indeed, another, more controversial way to address some of the issues outlined above is to make head franchisors more accountable for workplace contraventions that take place on their watch.

But rather than simply absolving the legal responsibility of franchisees in favour of franchisors, we need to ensure any extension of liability has the effect of changing the “compliance calculus” of all entities throughout the franchise network. In other words, both franchisors and franchisees need to believe that it is in their respective commercial interests to comply with employment laws and work together to put positive and proactive measures in place to achieve this.

Preventative measures – such as more rigorous monitoring of the workplace practices of franchisees and greater employment-related support and assistance for franchisees and workers – may serve to ensure businesses in the franchise network not only survive, but thrive. And perhaps more importantly, the workplace rights of franchise workers are respected and protected – regardless of which entity actually employs them.

This is part of a series on franchising. Read more here.