Let's call a spade a spade – the biggest challenge many franchise systems are facing is how to achieve enhanced compliance and reduce the risk of substantial brand damage in circumstances where they are concerned franchisees will deliberately circumvent enforcement and compliance initiatives.

Most franchise systems have introduced, or are in the process of introducing, enhanced training, support, extra monitoring and all the sorts of initiatives workplace relations experts and the Fair Work Ombudsman recommend. But franchise CEOs are not yet sleeping easily, as they have observed a problem that is more widespread, and in some cases more culturally ingrained, than most people thought – deliberate franchisee non-compliance. And not in circumstances where the franchisee is struggling to make ends meet, but in circumstances where, to be frank, there is no excuse.

We have developed a concept called a Compliance Bond that some clients may consider introducing. Interestingly this initiative was given implicit endorsement by the Fair Work Ombudsman report into the poultry industry's Baiada Group. The Australian Financial review article of November 28, 2016 noted that Baiada's payroll system included a $50,000 bond from contractors.1 According to Baiada, "In the event that a contractor does not meet their wage obligations, the bond money is used to ensure workers receive their full entitlements".2 The bond arrangement supplements a compensation fund similar in concept to that established by 7-Eleven for workers impacted by franchisee non-compliance.

Bonds are already used in several areas in franchising, notably in relation to shopping centre leases and some financing arrangements. We think there are circumstances where they could be appropriate in the context of franchisee workplaces, notably:-

  • for new franchisees, where the arrangement can be built into the franchise model;
  • in the context of transfer of an existing franchised business; and
  • for existing franchisees where default has been identified, as a condition of the franchisor agreeing not to terminate the franchise agreement.

There are of course other factors to consider, including whether the introduction of a Compliance Bond is fair in the context of the new legislation that prohibits unfair contract terms in standard form small business contracts, and whether this additional requirement makes the franchise more difficult to afford or finance. Plus, franchisees will ask questions such as who is entitled to any interest earned on the bond, or even seek to register a PPSA interest. Such an arrangement might increase a franchisor's exposure (legally or morally) if an issue arises but is under-funded or a franchisor pays out on a claim which is challenged. Care needs to be taken in setting up the Compliance Bonds, and drafting the relevant documentation. Franchisors may need to consider establishing a compensation fund alongside the Compliance Bond framework so that the purpose is seen as being consistent with protecting vulnerable workers, not as a penalty arrangement where only the franchisor benefits. But the idea clearly has merit.

The insurance industry agrees. In preliminary discussions with one major insurance organisation the concept of a franchise industry fund has even been discussed, backed by an insurance policy that would mitigate the cash impact.

Watch this space for further developments, but if you think there may be benefits in considering the Compliance Bond concept call any member of our national franchise group.

Footnotes

1 Adele Ferguson, ' Baiada cleaning up act after wages scandal', Australian Financial Review (online), 28 November 2016.

2 Ibid.