Petrol giant Caltex Australia has been blasted by the Fair Work Ombudsman for widespread and systemic underpayment of wages and an unsustainable operating model across its franchise network.

The report, the culmination of a lengthy investigation into one of the country’s biggest franchise operators, comes days after Caltex shocked the market with a decision to exit franchising.

The FWO has found 76 per cent of Caltex stores audited were exploiting workers, including breaching workplace laws and “significantly” under paying award wages to young foreign workers on visas.

In a statement to The Australian Financial Review, Caltex confirmed it had completed 293 audits – which represents half its franchise network. It said for the period from October 2016 to mid-2017 its audit results were in line with the workplace regulator.

Systemic non-compliance

The regulator found evidence of wage underpayment, non-payment of overtime and penalty rates, poor record keeping and pay slip breaches.

It said the lack of records “suggests serious and systemic non-compliance”. In some cases there was a deliberate falsification of payroll records.

It said Caltex’s failure to put effective systems in place to ensure its system complied with work laws contributed to the underpayment of workers.

“In light of this alarmingly high level of non-compliance across its retail fuel outlets, I am not surprised by Caltex’s announcement to the ASX last week that it will transition franchise sites to company operations,” Fair Work Ombudsman Natalie James said.

Caltex told franchisees and investors on February 27 it would convert hundreds of franchised stores to corporate-run stores by 2020, at a cost of up to $120 million.

The Financial Review can reveal that a week earlier, on February 21, FWO Natalie James met a group of senior Caltex executives, including chief executive Julian Segal, to discuss the investigation, the rate of non-compliance, and inform them a report would be made public the week beginning March 5.

“FWO’s report shows Caltex Australia has been presiding over a non-compliant and unsustainable operating model,” Ms James said.

Caltex says 60pc of stores non-compliant

Caltex said in a statement the decision to transition all Caltex stores into a company-operated structure was not influenced by the wage underpayment issue, but the outcome of a strategic review.

“The operating model review determined that controlling our core business is the best way to achieve our retail growth objectives,” it said.

Rampant wage fraud across the franchise network was exposed by Fairfax Media in late 2016. It found systemic wage abuse and falsification of payroll records across the network of stores.

Insiders said head office had known wage fraud was rampant and key senior management, who have since left, had covered it up.

Caltex said its audits since mid-2017 revealed that 60 per cent of stores were non-compliant.

“To us, it demonstrates the value of whistleblowers and the need to make them feel safe to come forward,” Caltex said in a statement.

“Based on declining whistleblower activity over time, and other observations to date, we expect we will see this non-compliance rate decline further as we complete the final tranche of audits during 2018-19.”

In response to the media investigation, Caltex set up a $20 million compensation scheme for underpaid workers.

The scandal damaged the brand and prompted Caltex to commit to auditing all its franchisees to ensure they were paying correct wages. In March 2017 it considered changing its name.

A name switch would have saved the company tens of millions of dollars a year in licence fees to multinational Chevron Texaco.

Demand for compliance deed

The FWO called on Caltex to enter a proactive compliance deed.

“The Australian public expects nothing less from such large and reputable companies and recent changes to the law mean that in some circumstances franchisors or holding companies can now be held liable for breaches or underpayments by their franchisees.” Ms James said.

Caltex said the option of a compliance deed was taken off the table on February 21. “We find this confusing, given the discussions last year,” Caltex said.

As part of its investigation, the FWO visited 25 stores across the country, and found 100 per cent non-compliance in Sydney, 71 per cent non-compliance in Adelaide, 67 per cent in Melbourne and 60 per cent in Brisbane.

During the investigation two franchisees were slapped with legal action, while others were hit with infringement notices, 11 compliances notices and 16 formal cautions.

Ms James said if underpayments were replicated throughout the business, it could add up to millions of dollars of underpayments.

Caltex is the latest in a line of companies found to be underpaying workers. Many are franchisors including Domino’s, United Petroleum, Retail Food Group, Pizza Hut and convenience store giant 7-Eleven, which has so far paid back more than $130 million in underpaid wages.

“A large number of employees at the audited sites are young and migrant workers, cohorts that we know to be particularly vulnerable to workplace exploitation and reluctant to complain about mistreatment,” Ms James said.

Caltex said wage underpayment and mistreatment of vulnerable workers was unacceptable.

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