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Education and Employment References Committee
20/11/2015
Australia's temporary work visa programs

DE BRITT, Mr Kym Anthony, General Manager, Franchise Council of Australia

O'DONNEL, Mr Sean, Director and Franchising Legal Professional, Franchise Council of Australia

PAUL, Mr Michael, Chairman and Franchisor, Franchise Council of Australia

[14:09]

CHAIR: Welcome. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. The committee has received your submission. Thank you. I now invite you to make a short opening statement of no more than a few minutes. At the conclusion of your remarks, I will invite members of the committee to put questions to you.

Mr Paul : Thank you for the opportunity to appear before you this afternoon. We represent the Franchise Council of Australia, otherwise known as the FCA. The FCA is the peak body for Australian franchising. Our sector is the backbone of Australia's small business community. Importantly, franchising is a business framework that supports many thousands of independent small business operators who otherwise would not be in business. One of FCA's key roles is to promote best practice. We have worked, and we will continue to work, very closely with government and regulatory authorities, including the ACCC, Fair Work Australia, the Fair Work Ombudsman, and our members to ensure that the very important economic contributions and social contributions our members make to this country and the communities they operate in continue to grow.

Importantly, 95 per cent or franchisors and almost all franchisees fall within the definition of small business. To provide some context around this, Griffith University's Franchising Australia2014 report found that 25 per cent of franchise systems in Australia operate at 10 or less franchise units, and around 62 per cent of franchise systems operate at less than 50 franchise units. Only five per cent of franchise systems operated more than 500 franchise units. 7-Eleven operates 620 franchise units, running a business of a vastly greater scale than the majority of franchise systems in Australia. Griffith University's Franchising Australia2014 report also surveyed 123 franchisors about the number of staff employed in their head offices, finding the average total number of employees, including full-time, part-time and casual staff, was around 21 total staff.

7-Eleven employs more than 120 head office staff. This provides resources and infrastructure that enable 7-Eleven to deliver a comprehensive day-to-day business model, including, for example, the payment of invoices on behalf of franchisees and the provision of a payroll service. This model is atypical of the sector as a whole. 7-Eleven's profit-share arrangement with franchisees, which works on a split of gross profit, has already been discussed at length. But we would, again, point out that this structure enables 7-Eleven to provide ancillary administrative services, such as bookkeeping and payroll, to their franchisees. By comparison, virtually all other franchise systems in Australia operate a system where the franchisor takes a small royalty of around six to eight per cent of a franchisee's revenue income.

By drawing these comparisons, the FCA is not making a value judgement on which business model is better or more sustainable for franchisor and franchisee alike but is merely seeking to demonstrate the significant difference between the 7-Eleven model and the rest of the franchising sector. Given the very unusual nature of the 7-Eleven model, we are keen to ensure that, on behalf of the many small businesses we represent, any regulatory responses recommended by the committee are appropriate and do not impede or prejudice the broader franchise sector. The FCA is working with, and has in the past worked with, the Fair Work Ombudsman to support workplace compliance within the franchise sector. The FCA supports the extension of powers and additional resourcing of the Fair Work Australia and the Fair Work Ombudsman to ensure enhanced compliance across all businesses.

The FCA strongly believes that the current level of fines in the Fair Work Act should be increased, with additional provisions to ensure directors of an employer entity are personally liable in the event of the entity being liquidated without satisfying debts to employees and penalties to Fair Work Australia. The FCA would support amendments to the Franchising Code of Conduct to allow a franchisor to immediately terminate a franchise agreement if a franchisee commits a serious breach of workplace legislation.

With the committee's permission, we would like to address a couple of key areas that we believe would be of assistance. These areas are amendments to the Franchising Code of Conduct, the issues with accessorial liability, the need for increased penalties and the importance of a reversal of the onus of proof to assist the Fair Work Ombudsman in assessing records. We would be pleased to take any questions in those areas or on any other matters.

CHAIR: Thanks very much, Mr Paul. I just have a couple of questions. I think you heard most of the evidence from the Fels panel. I am just wondering if you have any comments to make about the establishment of a separate entity, Independent Claims Pty Ltd, to pay out underpayment of wages.

Mr Paul : I do not think the FCA at this point has any comment to make. We have just heard about that. I think we would have to take that on notice in terms of our response.

CHAIR: You have said in your submission and in your opening statement that the franchise model that 7-Eleven have set up is unusual, and you went to some of the reasons for it being unusual in your submission. Do you have anything further to add to the panel in relation to those comments today?

Mr Paul : It is very atypical of the franchise sector. Most franchise systems—and I have run one myself for 22 years—operate very much on the basis of providing support and guidance to franchisees as independent small business owners and, in a sense, being paid a small royalty fee for that service. So the arrangement—the business model—was very unusual in franchising throughout Australia and in fact probably even the world.

I would also say that the in camera evidence that seems to be coming through with respect to the abuses within the 7-Eleven network—employees being underpaid and understaffing—seems to be related to the convenience industry, particularly those operating in the 24-hour segment, where they employ temporary foreign workers.

CHAIR: They have not given evidence in camera.

Mr Paul : Sorry.

Senator McKENZIE: It is public.

CHAIR: Anyway, have you finished your remarks?

Mr Paul : Yes, thank you.

Senator McKENZIE: Thanks, everyone, for being here. You say 'the unusual nature of the 7-Eleven model' in your submission. Can you give us a little more detail on what you mean by 'unusual'.

Mr Paul : It is unusual for a franchisor to collect the income receipts of a franchisee business, to pay all the expenses or a lot of expenses relating to the franchisee business, and to provide a payroll service and pay employees directly. It is very unusual in that respect.

Senator McKENZIE: When you say 'very' unusual, Mr Paul, you have all your members and you know how they run their businesses. Is 7-Eleven the only franchise business that runs, as you have outlined it, so unusually among your membership?

Mr Paul : I would probably refer that question to Kym De Britt, our general manager. He may have the details on that.

Mr De Britt : I do not have the exact details. What I can say is that it is the only one I have ever heard of.

Senator McKENZIE: Thank you, Mr De Britt. Given that you are the general manager, I would assume that is a very unique model, then, given that it is the only one you have ever heard of.

Mr De Britt : Yes.

Senator McKENZIE: You say that, essentially, going to our inquiry, you back the ACCI's submission where you look at resourcing Fair Work Australia and the Fair Work Ombudsman. You made some comments around their role in ensuring compliance et cetera. ACCI's evidence was: they wanted to see more focus on compliance and education. Can you flesh out for us your views, particularly when you look at your members and the role of those bodies in compliance and education.

Mr Paul : Yes. We have been working very closely in the last five years with Fair Work Australia. I might ask Kym to elaborate on some of the initiatives that we have been working with them on.

Mr De Britt : We have worked closely with Fair Work for the past five years. We have run a number of initiatives: regular articles through our franchising magazine to our members. We have run a number of voluntary audit programs where franchise systems have volunteered to have their systems audited by Fair Work and worked with them. As we speak, we are currently working on a program with Fair Work to educate franchisors on how to detect if a franchisee may possibly be breaching workplace relations. From that, and what we have seen, we would support two areas—not that we would have much say on increasing resources to Fair Work, but the area we would see as a greater deterrent is in substantially increasing the fines. We would support that. To back that, we supported the same thing with the revision of the franchising code which came into place recently. The fines in the franchising code were increased substantially, which we supported wholeheartedly.

Senator McKENZIE: Given that you claim that the model of 7-Eleven—and the uniqueness of it is recognised—allowed for this level of illegality to occur, how can you assure yourself that there are no other franchise operations where this is occurring? I mean there has been a lot of claims publicly that 7-Eleven is not the only one out there. What steps have you been taking as a peak body to assure yourselves that the franchise brand more generally is not damaged and that there aren't other members in your organisation who are similarly acting illegally?

Mr De Britt : Firstly, we have taken it from our relationship with Fair Work that, working with them over the past five years, we have had no evidence or feedback to support that there has been an epidemic problem.

Senator McKENZIE: Are United fuels stations part of a franchise group?

Mr De Britt : Yes.

Senator McKENZIE: So you are confident that United fuels stations—

Mr De Britt : We do not have the information within our organisation to be able to say either way.

Mr Paul : No evidence has come forward to us even through our relationship with Fair Work Australia.

Senator McKENZIE: Waiting for the evidence to come forward is one thing, but how do you assure yourselves of the integrity of the franchise model more generally outside of 7-Eleven?

Mr Paul : The FCA does have professional standards with respect to its members.

Senator McKENZIE: Which I assumed 7-Eleven signed up to?

Mr Paul : Correct. Again, it comes back to the uniqueness of this convenience store model: 24 hours, employing temporary, foreign workers. It does seem to be prone to exploitation of workers by franchisee owners. From what we can see, it is certainly not a policy issue within the franchise sector but confined to this particular industry.

Senator McKENZIE: But the council is quite comfortable in assuming that 7-Eleven is the only franchise group in which this type of illegal behaviour is occurring?

Mr De Britt : We are not in a position to answer that either way. What we have done is—

Senator McKENZIE: I think you are. You have to be. If you cannot then what confidence can the broader public have?

Mr Paul : I do not believe it is systemic. There is certainly not evidence for us to say that it is systemic in any other franchise system—unless evidence comes to us to suggest otherwise. But we do work closely with the Fair Work Commission to try to get feedback on any issues. We have our own complaints handling system which is a system where anyone can complain about what our members are doing wrong—maybe they are violating the law and so forth. But we have had nothing to suggest that there is any systemic issue within any other franchise system.

Senator RICE: I am following up on whether it is systemic or not. You speak of convenience stores. People have suggested United Petroleum as being another chain where—

Senator McKENZIE: It is an accident waiting to happen.

Senator RICE: Yes, it is an accident waiting to happen. You have also said that it is typical for franchisees that six to eight per cent of their royalties go to the franchisor. Do you have information about each of the franchise arrangements of the members of your council?

Mr De Britt : No, we do not keep individual information on the arrangements between the franchisors and the franchisees.

Senator RICE: How do you know that six to eight per cent is typical?

Mr De Britt : We took that information from the Griffith University survey. They run an independent survey of the franchising sector every two years and report back.

Mr O'Donnel : Which is the only survey done comprehensively in Australia about franchising.

Senator RICE: Do you know of any other franchise arrangements that are considerably higher than that six to eight per cent?

Mr Paul : Not that I am aware of. There could be. The reality is there is no registry in Australia that collates this data. Under the franchising code of conduct, franchisors are required to prepare a disclosure document. There is no registry currently that collates all that and has that information available.

Senator RICE: Do you think there should be?

Mr Paul : Yes, I think it makes a lot of sense.

Senator RICE: On notice, could you provide information from that Griffith University report as to whether there are any other companies that have a much greater amount of royalties being paid to the franchisor?

Mr Paul : Yes.

Senator RICE: Thank you.

Senator O'NEILL: I take you to your comment that you are there to support and provide guidance to franchisees. What is the typical nature of your support and guidance to the franchisees in the 7-Eleven chain? Do you see them independently or do you advise head office? What is your relationship with the 7-Eleven group?

Mr De Britt : There is confusion on the question there. The Franchise Council does not get involved at all in the operation of any business. When Michael was talking about guidance for franchisees, he was talking about as a franchisor in his operation to his franchisees.

Senator O'NEILL: Okay, so the organisation does not provide support to the franchise sector. What do people get when they sign up to your organisation?

Mr De Britt : The Franchise Council predominantly is a voluntary membership organisation. We provide education and networking events. Conferences and advocacy are the predominant—

Senator O'NEILL: Given that there are 620 franchises that are involved with 7-Eleven, how significant would they be at those networking events?

Mr De Britt : We have very few franchisees who attend our events. It is predominantly franchisors who attend the Franchise Council events. The franchise systems usually run their own conferences and the franchisees within their systems generally attend their own system conference rather than the Franchise Council conference.

Senator O'NEILL: Okay.

Senator RICE: Is your membership mostly the franchisors rather than the franchisees?

Mr De Britt : It is the franchise system.

Senator RICE: What proportion of your membership would be franchisors as compared to franchisees?

Mr De Britt : We have 640 members; 480 of those are franchise systems. But what we say is if the franchise system is a member then all of the franchisees are automatically a member and they can bring them to get advice.

Senator McKENZIE: Can I ask a governance question. Was 7-Eleven on your board?

Mr Paul : Yes it was.

Senator McKENZIE: For how long?

Mr De Britt : Warren Wilmot was on the board for about 10 months, yes.

Senator McKENZIE: In what period of time? Can you, for the last 10 years, let the committee know how often and for how long 7-Eleven was represented on your board?

Senator O'NEILL: In any shape or form. Thank you, great question. In terms of the members of the board, are there franchisees on your board seeing as though they are automatically engaged in the system? Or is that all franchisors?

Mr Paul : Currently, no.

Senator O'NEILL: And predominantly no?

Mr Paul : In the past, we have had franchising members on the board but, currently, no.

Senator O'NEILL: Are you aware that there is a proposed variation to the store franchise agreement for 7-Eleven at the moment?

Mr Paul : We have read about in the press, yes.

Senator O'NEILL: The model that you spoke about that is atypical is now being replaced by something new. You have no scrutiny of that. Have you been asked by any of your members to give them any support?

Mr De Britt : No.

Senator O'NEILL: Are 7-Eleven still a member of your group?

Mr De Britt : They currently are, yes.

Senator O'NEILL: Have you had any communications with them since this has emerged?

Mr De Britt : Yes. Once this emerged, a letter was written to 7-Eleven putting to them the allegations and if they could respond to the FCA in the context of our member standards.

Senator O'NEILL: Have you received a response?

Mr Paul : No we have not.

Senator O'NEILL: Can I ask you to consider whether you would make that document available to us, the letter of request and what you said. Given that you are aware, as we all are, from the media that there is a current store franchise variation agreement and the heat that is around 7-Eleven, have you sought to provide any advice or guidance because, frankly, all your members are going to be impacted if this is even worse than the one that has already come to light.

Mr Paul : The FCA cannot offer guidance and support around how a business model should work. That is ultimately going to be decided by the franchisor working with the franchisee, in this case with 7-Eleven. We are not in a position to understand all the issues around that. The FCA operates independently. Its key pillars are: education about best practice, representation and advocacy to ensure that the sector, which is a $144-billion sector and employs some 640,000 people and has 79,000 franchise outlets, continues to grow and develop. It is our role to ensure that we provide the framework for that.

Senator O'NEILL: So you are representing that group today and advocating here. My question is, given what is going on with 7-Eleven in the public place, do you accept that you have an advocacy role to challenge 7-Eleven to start to do some of this renegotiation more transparently and publicly, and perhaps consult with your organisation?

Mr Paul : We have not to date given that any consideration. We have not in the past got involved in those issues directly with a particular franchise system.

Senator O'NEILL: Can I suggest it might be time, Mr Paul, based on what has been going on. Can I also ask if you are aware that there are indications that there is a deadline of 30 November for franchisees to sign this new agreement? I understand many of them have a significant number of questions about it but they are being pressured to sign the agreement. Is that of concern to you?

Mr O'Donnel : Yes that would be of concern to us if that was correct. The other thing that we should be clear about is that the ACCC are the regulator for this sector. They are heavily involved in our sector and that is certainly something that I would suggest should be taken up with that ACCC if there is an element of compulsion being put upon franchisees that is not fair because that is a part of the ACCC's role. They do have powers to step in and make certain decisions if franchisor is not acting appropriately.

Senator O'NEILL: Mr O'Donnel, what is your role?

Mr O'Donnel : I am a director at FCA.

Senator O'NEILL: What are your qualifications?

Mr O'Donnel : I am a lawyer.

Senator O'NEILL: Wonderful. If you heard that franchisees were being told to use a particular firm of solicitors attached to the franchisor and not to seek independent advice, would that raise any concerns for you?

Mr O'Donnel : It would raise concerns for me if it was put to them that that was their only option. It is not uncommon for franchisors to say that they have a panel of lawyers that know about franchising and they would say: 'You are welcome to go and speak to any of those firms but, ultimately, it is your choice.' Certainly I would have a concern if they were being told you could only use one law firm because that is certainly not—

Senator O'NEILL: So if they are being directed to one law firm?

Mr O'Donnel : I do not have a problem with them saying you can use that law firm but, if there was an element of compulsion, then I do not think that would be fair.

Senator O'NEILL: The language of compulsion might be a little bit debated but the date of 30 November looming means that sometimes people's choices might also be time limited and lead to a degree of compulsion that is not articulated in a piece of writing. So I am putting that on the record as a concern that I think you should register, if your role is to be a representative of the sector, and advocate for it. That is the first level of concern. Can I ask you what you think about what you heard today about 7-Eleven head office, given their atypical structure, where they were ones running the payroll and paying the invoices, that they are reserving their right to pursue franchisees for moneys that may or may not appear in the account of Independent Claims Pty Ltd?

Mr De Britt : The only thing that I would say, having a brief knowledge of the whole situation, is that the franchisees are the ones who were effectively underpaying the employees, from what I have heard in these hearings. 7-Eleven have wanted to make good the repayments and then seek recompense back from the original employer, who was the person who underpaid them to start with.

Senator O'NEILL: So you cannot see anything particularly wrong with that at the minute?

Mr De Britt : No, I would think that is quite an acceptable practice.

Senator O'NEILL: Could you give us an indication of how many of your franchisors and their staff have a business model where it is overwhelmingly of Indian subcontinent or Chinese workers?

Mr De Britt : We have actually tried to look for that information and we do not have it. We actually have that Griffith University franchise study organised every two years and it will be done shortly. I am in the process of having a meeting with Griffith University and one of the questions we want have built into that survey now is to obtain that sort of information.

Senator McKENZIE: It is very hard. I imagine collecting that data would it be inherently problematic.

Mr De Britt : Yes, you are only going to get an indicative figure.

Senator O'NEILL: But people having overseas students working for them would be the trigger, the indicator.

Senator McKENZIE: That might be a question to ask.

Senator O'NEILL: Overseas students predominantly, we have heard from 7-Eleven, are Indian, Pakistani and Chinese. The model of the transfer of sales from one franchisee to another, I understand, is quite different in the 7-Eleven model from other models. There is a conditional structure of transfer that does not involve a payment for goodwill. Do you understand the 7-Eleven transfer structure?

Mr De Britt : No, I have no knowledge of it.

Mr Paul : No, I do not personally know their structure. What I can say is that the code sets out a regime that does have conditional transfers. Transfers are subject to conditions which the code actually sets out as well.

Senator O'NEILL: What are those?

Mr Paul : Off the top of my head, they are things like the ability of the new franchisee to pay, to be financially viable and that they are fit to be able to operate the franchise system. Often there are conditions that the current franchisee is not in breach of the franchise agreement—things like that. That is all codified in the code as to what preconditions you would need to meet before a business could be transferred.

Senator McKENZIE: Just clarifying, this is the code that 7-Eleven operate under?

Mr Paul : Yes, all franchisors, so it is a mandatory industry code, correct.

Senator O'NEILL: So how would you characterise the power of the code, the strength of the code, its capacity to have people comply with the standards written into the code?

Mr O'Donnel : The code provides a base minimum. Essentially the code is set up to protect franchisees in the sense that most of the code is about providing an incoming franchisee with a range of disclosure information that you would not normally get if you were buying a regular business. The code also prescribes a franchisor has certain rights when it comes to things like marketing funds. There are rules and regulations around, when you take money from a franchisee for marketing, how you use it that money. Also, more importantly, there is a mechanism, which is a mandatory system of mediation. If there are disputes between franchisees and franchisors, it tries to resolve those disputes, which then correlates with the limited rights of franchisor to terminate a franchisee and that is to protect franchisees. The idea being that it is obviously usually a significant investment and there are only limited circumstances in which a franchisor can terminate a franchisee immediately. There are circumstances where they can give them notice of a breach and there is a remedy period but that also brings into play the mediation process so that if they disagree with the dispute, they can take that to mediation have it resolved and that is funded essentially through the government.

Mr Paul : I might add, a key platform of the code is the disclosure document to ensure that respective franchisees, when they do enter into a franchise agreement, are fully informed on the most important details about that particular franchise before making a decision.

Senator O'NEILL: We have had quite a deal of evidence in the Parliamentary Joint Committee on Corporations and Financial Services in our inquiries into the reverse psychology of having everything documented. People feel that they are being protected by that documentation. The profile of the people who are going into these sorts of franchise arrangements with 7-Eleven is husbands and wives with an average income of about $65,000 before they go in, no prior business experience, walking into very sophisticated arrangements. They might be well documented but there is an incredible power inequity there in the same way that we are seeing with loan documents. I just put that on record as a concern in another area where there is a degree of power inequality. I have heard that a large number of the lending to the 7-Eleven franchisees has come through the ANZ Bank. Are you aware of that?

Mr De Britt : No.

Mr Paul : No.

Senator O'NEILL: I have also been advised that the bank makes it an additional condition of lending to the 7-Eleven franchisees, up to maybe 70 per cent of the amount, that there is no change in the control of shareholdings or no takeover of the franchisor 7-Eleven Stores Pty Ltd. What do you think about that?

Mr Paul : I am not sure. Is that unusual?

Mr O'Donnel : Can you repeat the question.

Senator O'NEILL: There is no change in the control of shareholdings or no takeover of the franchisor 7-Eleven Stores Pty Ltd. Basically they do not own the business in toto to sell on.

Mr O'Donnel : That would be the franchisee. I am not aware of those arrangements if they exist.

Senator O'NEILL: Is that how it normally operates?

Mr Paul : I think that comes back to the unusual model of the 7-Eleven business.

Mr De Britt : I think that is a question you need to put to ANZ Bank.

Senator O'NEILL: Do you have any interactions with the Fair Work Ombudsman with regard to franchising?

Mr De Britt : Yes.

Senator O'NEILL: What would you say is the nature of those conversations in recent times?

Mr De Britt : In recent times it has been numerous and most of it has been in relation to articles and programs that we have been running in conjunction with them and, very briefly, on 7-Eleven.

Senator O'NEILL: What are the programs you have been running in conjunction with them? Do they have anything to do with correct wage payment?

Mr De Britt : No, they are programs that we are launching with Fair Work in educating the franchisors on how to detect if a franchisee is breaching workplace regulations. We have got an article by Fair Work which is going in December's Franchise Review, which goes out to all our members. At my level, it is about organising with them for the articles but that is the level of regular conversation we have.

CHAIR: Thank you very much for coming along today. We appreciate the interest you have shown and the evidence you have given us today.

Proceedings suspended from 14:46 to 14:58