Adele Ferguson, 07 December 2015

It has been billed a make or break event for 7-Eleven, but a new profit-sharing model and offer to stump up millions of dollars in compensation for wage fraud is being scrutinised by the $170 billion franchise industry.

The new agreement, to be signed on December 7, has involved a lot of horse trading to try and get franchisees over the line. Fairfax Media can reveal that in the past few days 7-Eleven head office agreed to fund up to $25 million of wage fraud claims assessed by an independent wage review panel headed by former ACCC chairman Professor Allan Fels.

If the claims received are more than $25 million, franchisees will pay the next $5 million and anything after that will be split 50:50 between franchisees and head office.

It is quite a concession given the original deal was for head office to set up an “independent” panel to review wage fraud claims. Any payments would be clawed back from franchisees.

Not surprisingly, 7-Eleven was quick to point out in a letter to franchisees that “this should not be taken to suggest that 7-Eleven has any liability for the conduct of the franchisees”.

So far 1000 current and former staff have applied for a review and 15,000 letters have been sent to current and former workers. It is estimated that more than $300 million in wage fraud has occurred across the network.

Indeed, the “variation agreement”, which franchisees have been asked to sign, is an attempt at future-proofing it from future claims: “The franchisee shall indemnify and hold SEA [7-Eleven Australia] and SEI [7-Eleven Inc] harmless from liability for any representations by, and for any loss or damage caused by any act or omission of the franchisee or the franchisee’s agents, representatives, servants, employees or invitees, including but not limited to any liability for payment of Employee wages and other entitlements which accrues or accrued anytime during the term of this agreement in connection with the franchisee’s operation of the store, including where SEA effects payment of wages or other entitlements to an employee in order to rectify an underpayment and irrespective of whether the agreement has been terminated.”

But the offer to pay more than 50 per cent of the compensation payments has sent chills down the spine of others in the franchise industry who, until now, have been able to leave wage fraud issues for franchisees and Fair Work to sort out.

With more than 1.3 million workers in Australia on visas, equivalent to one in 10 workers, the decision by 7-Eleven to contribute to the payments could open up Pandora’s Box.

Since the revelations of systemic wage fraud across 7-Eleven’s 620 stores, emails have flooded in that suggest the convenience store chain is the tip of the iceberg. There are allegations of practices of underpayment taking place in some stores in franchises including Bakers Delight, United Petroleum, Subway, Domino’s, Pizza Hut, Eagle Boys and Nando’s.

Fair Work is more than a year into its investigation into 7-Eleven, including looking at whether head office is somehow complicit and has therefore been an accessory to the misconduct. It will release a report early next year.

Separately, a bill has been introduced into Parliament by Greens MP Adam Bandt to make franchisors responsible for wages and conditions of their franchisees.

The bill aims to amend the Fair Work Act to make parent companies, or franchisors, more responsible for the behaviour of their franchisees, specifically when it comes to the underpayment of wages.

The new legislation –if it is backed by the government and/or Labor and the crossbenchers – would enable any underpaid workers in a franchise arrangement to make a claim against head office instead of having to tap the franchisee, who can terminate their position or threaten to deport them if they are foreign workers who have breached their student visa conditions by working more than 20 hours a week.

The proposed amendment would put the onus on the franchisor to make good on the repayment of wages to workers and then reclaim the money from the franchisee.

In the case of 7-Eleven, many in the franchise network argued that they had little choice because the profit sharing model was stacked in the master franchisor’s favour, where 57 per cent of gross profit went to head office and the rest went to the franchisee, who then had to pay wages.

It prompted Professor Fels to slam the company’s model, saying the only way franchisees could make a living was by ripping off their workers. “It seems to me that the business model will only work for the franchisee if they underpay or overwork employees.”

Fair Work Ombudsman Natalie James has also been vocal about the model, saying the investigation had found some franchisees were being put under financial pressure. “What is 7-Eleven head office doing to ensure that the response to that pressure is not ripping off their workers?” she said.

“I think 7-Eleven needs to wake up to the fact that this conduct is persistent, and it is a clear pattern and that really it’s their moral responsibility, their ethical responsibility to step up and take some steps to do something about it.”

Out of its 57 per cent gross profit cut, head office pays the rent (some of the properties are owned by 7-Eleven), supplies all the equipment, fittings, utilities and back office services including payroll.

From their 43 per cent takings, the franchisee pays a raft of other running costs including all staff wages – which is a big expense.

7-Eleven stores are open 24 hours a day, seven days a week, which equates to an estimated wage bill of $230,000 a year for a store with one employee working each shift.

The new business model is no longer a one-size-fits-all profit split but is based on a sliding scale. Stores operating below a certain amount of income will split the profit 50:50. For stores with petrol stations attached the commission has been increased from 1 cent per litre to 1.5 cents per litre. The company has also tripled financial support to more than $300,000. It means a transfer of wealth from the two shareholders in the business, billionaires Russ Withers and his sister Beverley Barlow, into the pockets of the franchisees. In 2015, 7-Eleven has made a profit of $143 million for its shareholders.

The stakes are high. If franchisees don’t sign the agreement it could signal an unravelling of 7-Eleven, particularly if the franchisees go down the class action route.

A statement from head office didn’t give the number of franchisees who had so far signed the agreement, but said “there has been a positive response”.

A notice went out to NSW franchisees recently from the chairman of the newly formed 7-Eleven Franchise Association, saying “I on behalf of the national association state and confirm that the association has not agreed with head office to sign the newly amended contract… I assure you all that I am not and will not be signing this agreement”.

Whether that is a negotiating tactic or the franchisees want more, will be revealed this week.

Law firm Levitt Robinson is waiting in the wings. “The 7-Eleven Franchise Association has split between those who want to kowtow to head office and those who see the present impasse as an opportunity to negotiate a fair and viable agreement with head office, without resorting to class action litigation if possible, though this is still considered a serious option,” principal Stewart Levitt said.

Whatever happens, it has put the spotlight firmly on the franchise industry, the contracts, the code of conduct and the extent of their moral, ethical and financial responsibility when things go wrong.

* Adele Ferguson, Sarah Danckert​ and Klaus Toft won the Walkley Award for Business Journalism for 2015 last week for their Fairfax/ABC TV investigation into 7-Eleven.

Extracted in full from the Australian Financial Review.