3 Franchise Lessons for Australian Businesses
Guest post by Kristine Biason, a lawyer at LegalVision
Recently, a number of high-profile franchise networks including Bakers Delight, Pizza Hut and Domino's have come under the spotlight for non-compliance with employment laws. These examples highlight the franchisee's obligations to comply with the employment standards. In this article, we set out what franchisees should consider before hiring workers as well as purchasing a franchise business.
Lessons from Bakers Delight
The media scrutinised Bakers Delight for using an old collective agreement that does not provide their employees with penalty rates and overtime pay. The old agreement puts workers at a disadvantage compared to the General Retail Industry Award 2010, allowing them to lose out on wages. Many franchisees have engaged employees based on the old collective agreement. The Fair Work Commission may now require them to transfer existing employees to the General Retail Industry Award 2010. There are a number of key takeaways here:
- Franchisees should undertake their own research as to any applicable Awards;
- Franchisees should check the validity of any employment agreement that the franchisor requests them to use and ensure that it passes the “better off overall” test. This test compares agreements against the standard award to determine if an employee is “better off overall”;
- The franchisee should factor in the operational costs involved with engaging employees into any business plan to determine cash flow and potential profitability of a franchise;
- Non-compliance with employment laws may leave a franchisee vulnerable to investigation by the Fair Work Commission or union and employee challenges.
Lessons From Pizza Hut
The Fair Work Ombudsman has recently conducted an audit on a handful of Pizza Hut franchisees to determine whether they have been complying with employment laws. The audit has revealed that some franchisees have been hiring workers as “independent contractors” as opposed to employees. The audit has also found that franchisees have been underpaying their employees by classifying the employee under the wrong award. Further, the Fair Work Ombudsman found that some franchisees have not been keeping accurate records for their workers. There are a few takeaways here:
- Franchisees should be aware that they are entering employment contracts themselves and not through the franchisor. They will be responsible for non-compliance with employment laws;
- A franchisee should be aware of the difference between an independent contractor and an employee. The Fair Work Act makes Sham independent contractor arrangements unlawful;
- A franchisee should be aware of their obligations regarding record keeping and issuing pay slips; and
- A contravention of the Act can lead to fines from the Fair Work Ombudsman and possible litigation from the Fair Work Ombudsman or employees.
Lessons from Domino's
Domino's has recently announced that they will be paying workers 25% more if they work on Sunday. Customers, however, will offset this additional pay by paying a surcharge of 10% on Sundays. Domino's has stated that franchisees agreed to this arrangement. The pay increase was a voluntary move made by Domino's. Nevertheless, a new enterprise agreement is currently in negotiation. There are a few takeaways here:
- Franchisees are subject to the franchisor’s recommended retail pricing and employment costs, and they should take this into consideration when analysing the costs of operating the franchise and the potential returns;
- Franchisees may be subject to compliance with negotiated employment agreements or the minimum employment standards, and they will need to factor this into the costs of running the franchise; and
- The franchisor may require the franchisees to comply with national promotional campaigns that will require the franchisee to apply discounts. Franchisees will need to consider the impact of these campaigns when analysing the costs of running the franchise and the impact of discounting on a franchisee’s bottom line.
Franchisees are often exposed to the pricing models, contractual agreements, promotions and employment arrangements that are recommended by the franchisor. The above three recent examples showcase how the above factors merge and how the costs of engaging workers will require franchisees to take these costs into consideration when determining the viability of a franchise business model.
Franchises do not operate in isolation. Franchisees, however, do exist as separate legal entities from the franchisor entity and the Act will require them to comply with employment laws. By understanding the costs of compliance with the Act, a franchisee is better able to determine the potential return on their franchise purchase.
Are you a franchisor or franchisee and have any further questions? LegalVision’s franchise lawyers are more than happy to assist you with your matter.
Article by Kristine Biason. Kristine is a lawyer at LegalVision who works across a broad range of commercial matters. Kristine has a strong focus on franchising. She assists franchisee and franchisor clients throughout their entire business journey; from drafting agreements to providing advice on business structuring, licensing, leasing, employment law and international expansion. She is regularly involved in negotiating agreements, and providing commercial advice when it comes to litigation.