Paradise in peril for ‘global capital’ of franchising as new law looms

BRUCE BILLSON
March 2, 2017
The Australian

It was quite an eye-opener. Our 50-strong Australian group joined 4500 delegates from around the world at the International Franchise Association conference in the US a few weeks ago.

Australian franchising was on the lips of many attendees and international opinion leaders. Some of what was being discussed was undoubtedly good. 

The 8 per cent, or $146 billion, of annual economic contribution franchising makes to the Australian economy is a real positive and a big deal. Add franchised fuel and vehicle retailing and $1 in every $10 generated in our economy comes from the sector. Australia is the “global capital” of franchising. This fact had a Crocodile Dundee “Now that’s a knife!” impact when compared to the widely celebrated 2.7 per cent contribution franchising made to GDP in the US — its birthplace. 

But not all the attention on Australian franchising was as positive as we would have hoped. There was plenty of worried discussion about Australia’s flirtation with imposing so-called “joint employer” liabilities on to franchisors for the workplace non-compliance of franchisees. 

This will act as an enormous disincentive to franchising and represents an existential threat to the successful franchise model of enterprise. Growth and investment will be limited by brands. “Corporate” retail and service outlets will be favoured over franchise business opportunities, due to the risks and liabilities they would face from the actions of others. 

This would weaken investment, economic and employment opportunities and deny enterprising Australians an attractive, less risky and more supported pathway into their own business.

It would take the wind out of the sails of a vital sector that comprises more than 1100 brands supporting 79,000 business units that between them provide 472,000 people with employment. 

In the lead-up to last year’s election, there was prominent media coverage of wage underpayment and workplace irregularities at 7-Eleven. All sides of politics promised to get tough on franchise systems where a franchisee had done the wrong were thing. The “get tough” mantra amounts to “going after” the franchisor when a franchisee, which is the employer, has done the wrong thing in terms of the employees in their workplace. The idea is to pass laws that make the franchisor effectively the “joint employer” of the franchisee’s staff. 

It’s like holding a lawyer responsible for the actions of their client, even if the client has ignored legal advice or had done things the lawyer had no knowledge of or where no advice had been sought.

These political pronouncements have led local and international systems to revisit their thinking about investing and starting new businesses here. This uniquely Australian experiment risks dangerously undermining the foundations of franchising here. We risk being the global guinea pigs for a poorly conceived regulatory intervention targeting the franchise sector. Overlooked are the genuine efforts of franchise systems to make things right for employees and weed out any brand bad eggs. 

No one in the franchise community wants to see an employee underpaid and my experience is that small-business people overwhelmingly go out of their way to do the right thing. For those who set out to exploit employees, the current law and Fair Work Ombudsman works to hold these people to account.

Just last year we saw the FWO successfully prosecute a yoghurt dessert retailer for underpaying staff and other Fair Work Act contraventions. The court issued $146,000 in fines and other directions. Penalties were imposed on the direct employer (the franchisee) of the employees harmed, the director of the franchisee business, the master franchisor and the external payroll provider used by the employer because all were found to be a part of the Fair Work Act contraventions. 

The November 2016 decision was heralded by the Fair Work Ombudsman as precedent-setting. The “accessorial liability” sections of the Fair Work Act, designed to get to parties in addition to the direct employer that had conspired to commit or allowed a contravention to occur, were tested, found to be far-reaching and effective. This proved how powerful the existing law is.

Sitting alongside the powerful and not fully tested enforcement tools available under the law is the federal government’s support for the Franchise Council of Australia’s recommendations to lift the FWO’s capability.

A boost to the resources available to the FWO, increased penalties for breaches of the Fair Work Act and enhanced powers to collect evidence have been promised. This shows that there is no public policy case for the changes being contemplated in Canberra.

Yet an awful lot is at stake for a media-inspired regulatory misadventure to introduce unprecedented laws that fit up the franchisor for the Fair Work Act breaches of their franchisees where they have had no actual involvement.

Industry-led assurance approaches that focus on quality and lifting standards surely deserve a chance to succeed. The prospect of Canberra mandating joint employer liability is a concerning and problematic concept.

Let’s hope the parliament has not forgotten that a franchisee is not a fully owned and controlled subsidiary of a franchisor — it’s a separate business with all the opportunities and responsibilities of all other smaller enterprises. 

A franchisee has the advantage of benefiting from the knowledge, systems, product and pricing testing, supply chain, technical expertise and IP developed and deployed with the support of a franchisor. Franchising supports enterprising women and men to be in their own business but not on their own.

Once the legislation is introduced to parliament, we’ll all get to see the actual detail about proposed changes to a functioning and effective existing law.

I’m for the jobs, small-business formation, investment, innovation and economic growth made possible by the proven franchise model of enterprise.