By Caterina Apostolakos

In 2016, the Fair Work Ombudsman launched an inquiry into 7-Eleven stores Pty Ltd to investigate potential underpayments, unlawful cashback schemes and deliberate falsification of records. From an outside perspective, the billion-dollar enterprise (which operates as a franchise network) appeared to have meticulous and detailed workplace compliance procedures. However, there was still an absence of commitment to identifying and addressing possible workplace law breaches. At large, 7-Eleven exercised a high degree of control over the operations of its franchisees including management of their payroll systems, fortnightly visits by district managers, and biannual store audits. Despite these safeguards and protective mechanisms in place, there was a failure to detect the extent and severity of the underpayment scandal within the 7-Eleven network.

Shocking investigative findings

A high-level investigation into 7-Eleven’s franchise stores conducted by the Fair Work Ombudsman (FWO) led to findings of systemic underpayment of wages and illegal doctoring of payroll records. These breaches largely affected vulnerable workers, who were threatened and intimidated into remaining quiet, as they were worried that their visas may be cancelled if they raised issues.

Head office initially sought to pin blame these wrongdoings onto individual franchisees, despite the high degree of control over the operations of franchisees and the protective mechanisms which had been implemented. A whistleblower at the 7-Eleven head office claimed they deliberately ignored the systemic wage fraud throughout its franchise system. It was maintained head office did not merely turn a blind eye, as the fraudulent conduct itself formed a fundamental part of 7-Eleven’s business – the company’s profit had ultimately been enhanced by the underpayment of staff wages! These findings exposed that many of 7-Eleven’s franchisor agreements allegedly created a business model that was only profitable if workers were underpaid.

Actions taken

As a result of the FWO inquiry report in late 2016, 7-Eleven voluntarily entered into a Compliance Deed with the FWO to improve compliance and rectify underpayments. The courts awarded over $1.8 million in penalties against multiple 7-Eleven franchisees after the FWO brought approximately 11 litigations against the company. The FWO found that the systemic underpayment of wages centred around two unlawful schemes implemented by 7-Eleven. The first was the Cashback Scheme which involved wage exploitation whereby workers were forced to withdraw and hand back part of their pay to their employer, without reasonable excuse. The second was the Half Pay Schemewhereby employees were only paid for half their hours worked.

Who are these vulnerable workers?

So, why on earth would an employee agree to these illegal schemes created by 7-Eleven I hear you say? The vulnerability of these workers largely stemmed from their limited employment opportunities and financial pressures from living and educational expenses. With a large number of vulnerable workers within the 7-Eleven network, it was easy for 7-Eleven to operate in this manner.

It has been estimated that temporary migrant workers make up 10 per cent of the workforce. These are the individuals who are particularly susceptible to exploitation by employers due to language barriers and their ‘culture of acceptance’ of illegal working arrangements which further compounds their vulnerability.

The implication of this case

In many of the underpayment cases, the court recognised that conduct such as implementing a system requiring employees to repay wages they are owed and producing false records to disguise employees’ true employment situations, is reprehensible conduct and denies employees the minimum wage standards they are entitled to.

Unfortunately, 7-Eleven’s fraudulent underpayment scandal is not a stand-alone issue. Non-compliance with the Fair Work Act 2009 (Cth) (‘the Act’) has attracted substantial attention in recent times, which gave rise to a major amendment to the Act, increasing the protection of vulnerable workers. The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) (‘the Amendment’) was introduced as a result.

Changes in the Act

The new laws under the Amendment give rise to several changes for franchisors, holding companies, and employers. These changes were introduced to address the exploitation of vulnerable workers and hold those higher up in the supply chain more accountable. Some of the key aspects of the Amendment include:

1. Cashback schemes

Employers cannot require an employee or prospective employee to spend their money or give them money where it is unreasonable, or where the payment is for the employer’s benefit.

2. Serious contraventions

Contravention will be considered a serious contravention if a person knowingly contravened a provision of the Act as part of a systematic pattern of conduct. This new law provides that franchisors and holding companies can be liable for breaches of certain workplace laws by their franchisees or subsidiaries if they knew or could reasonably be expected to have known that the contravention would occur.

3. Penalty increases

Penalties for serious contraventions increased to $666,000 for companies and $133,200 for individuals. Please note that these amounts are subject to change.

4. Reverse onus if records are not kept

Where it is alleged an employer has contravened certain sections of the Act and they failed to keep employee records or provide payslips without reasonable excuse, the onus of proof will be reversed, and the employer will need to show that it did not contravene the provisions.

5. Increased FWO powers

The FWO has increased powers which may include requiring persons to provide information, documents, or attend and answer questions relevant to an investigation.

How does this affect your business?

The new penalties for employers who commit serious contraventions will be set at a level that may put the ongoing viability of the business at risk. Additionally, the Amendment has placed an even greater responsibility on the top line of an organisation in ensuring that misconduct does not occur. Hence, the organisation will be liable if their employers are non-compliant with the National Employment Standards or the Act. Therefore, it’s important that those involved in running a business ensure that they’re meeting their obligations.

Practical steps which businesses can take include audits of pay, working conditions, and record-keeping obligations, introducing record-keeping protocols, and implementing systems that enable the body corporate of franchises or subsidiaries to monitor compliance with workplace laws.

Failing to comply with the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) is risky business – you only have to look at the reputational damage of 7-Eleven, the huge financial penalties, and the reimbursement of monies owed to workers to realise just how serious wage theft is. Ultimately, franchisors or holding companies can be held liable for franchisees or subsidiaries if workplace laws are not followed – a very expensive risk.

End-to-end solutions for franchisors

While it’s rare to see a company deliberately underpay its workforce, regardless of whether an underpayment is accidental or not, franchisors need to ensure their network is protected and risks are mitigated.

HR Assured offers an end-to-end employment law solution for franchise networks. We work with a number of franchise networks and support them to ensure they’re compliant. From record-keeping, payslips and compliance audits to HR software and 24/7 telephone advice and support, we can support your franchise network.

For more information on the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) HR Assured clientsshould contact our Telephone Advisory Service.

If you’re not an HR Assured customer yet, but you’d like to try our award-winning Telephone Advisory Service for FREEcontact ustoday for a no-obligation consultation.

Caterina Apostolakos is a Workplace Relations Advisor at our parent company, FCB Group and HR Assured. Caterina provides employment relations advice and support to our clients’ businesses on a wide range of matters.