Adele Ferguson, 11 September 2015

After getting untold pressure from franchisees, politicians and the community over wage exploitation throughout the 7-Eleven franchise network, founder Russ Withers has finally agreed to fix the mess.

It will be a hard slog given wage fraud has been endemic for so long and the culture at 7-Eleven head office has been to turn a blind eye.

How the senior management team will now shift gear and oversee changes opens up another can of worms.

But the decision to bow to pressure and review the business model speaks volumes about the nature of the discussions with franchisees – and possibly the United States parent – since the scandal broke in a joint media investigation between ABC Four Corners and Fairfax Media late last month.

Like anything, the devil will be in the detail.

Withers has agreed to review the 57/43 per cent profit split, which delivers most stores’ profits straight to head office. Other safeguards are also in train, including developing an enterprise bargaining agreement for all interested franchisees, a franchise charter, an external audit of compliance to meet all obligations under the law and the franchise agreement.

It will be a matter of wait and see. To put it into perspective, the current model has helped Withers and his sister build a massive empire worth an estimated $1.5 billion.

The profits have been built on the backs of franchisees paying wages that have been described as “slave labour” and the franchisees deemed indentured slaves.

As the scandal erupted, trashing the reputation of the brand, the company has come out almost on a daily basis with different concessions, hoping each one would quell the anger of the franchisees and the community.

To date, none of the bones it has thrown to the franchisees has been enough.

The anger of franchisees is palpable. For the first time they have banded together and have got the upper hand. The franchisees for their part are concerned that the value of the stores they have invested their life savings in has been halved. Even if they wanted to sell, it would be difficult to get their goodwill back.

7-Eleven is now in a position where attracting new franchisees will be difficult and keeping existing ones on board essential to their business surviving.

On Wednesday the scandal reverberated across boardrooms when Withers and his deputy, Michael Smith, stepped aside from other board positions.

The message was simple: questionable corporate governance and poor risk management systems can have repercussions.

Board moves

Withers resigned from the Australian Olympic Committee with a statement “continuing claims about 7-Eleven and its business cannot be allowed to pollute the AOC’s work”.

Smith, who joined 7-Eleven in 1999, stepped aside as chairman of the Australian Institute of Company Directors until “an independent review commissioned by 7-Eleven is complete”.

In Smith’s case it might have been more fitting to have also waited until the completion of the findings of the regulator, The Fair Work Ombudsman, which is investigating 7-Eleven.

But the fallout will surely give the board cause for reflection on its role as well as the longer-serving senior executives. Are they the right people to clean up the mess?

The brutal reality is it would be difficult for any 7-Eleven directors or senior executives to plead ignorance to what has been going on among the franchisees, including underpayment of wages and falsification of payroll records.

The board is well aware that the regulator has conducted three separate raids on 7-Eleven stores in the past six years. Each raid uncovered serious problems with payroll.

These repeat findings should have raised alarm bells at board level – and among senior management – that more needed to be done, including better checks and balances.

The third raid, conducted in September 2014, found 60 per cent of the 20 stores raided had payroll problems.

In addition to the 20 stores raided, and the findings shared with head office, Fair Work took legal action against two other franchisees, one a former star franchisee who won a state franchisee of the year award, Mubin Al Haider.

While 7-Eleven conducted its own retail review payroll compliance audits in the past year, it didn’t report wrongdoings to the police or the regulator. Instead, it tried to deal with the problems internally, which obviously didn’t work because the problems continued.

It is why Withers agreed on Thursday to external audits to reduce the risk of a cover-up and to report any illegal activity to the police and the regulator.

The systemic wage abuse has touched the hearts of the nation. It is hard to hide from that. It is even harder to mount a case that it was a few rogue franchisees when the evidence says something different.

In the words of the Fair Work Ombudsman Natalie James: “The 7-Eleven franchise model is a highly controlled model and so head office needs to take some responsibility for the system that they’ve put in place given the prevailing pattern we’re seeing of fabrication of records and underpayment of workers in its operation.”

And that’s without seeing all the evidence.

Extracted in full from the Sydney Morning Herald.