Sivaraman, Giri; Turner, Patrick --- "The 7-Eleven wages scandal: the need for law reform" [2016] PrecedentAULA 51; (2016) 135 Precedent 53

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THE 7-ELEVEN WAGES SCANDAL: THE NEED FOR LAW REFORM

By Giri Sivaraman and Patrick Turner

The scale and extent of wage fraud at 7-Eleven franchises, uncovered by Fairfax and the Australian Broadcasting Corporation, has shocked Australians who were complacent about the compliance of employers with industrial laws. However, as Mike Smith, Chairman of 7-Eleven Stores Pty Ltd (the franchisor) observed in his testimony before the Senate Education and Employment References Committee, for many franchisees and small business owners, ‘you can negotiate with your staff to pay (sic) without much regard for what the award is ... (this practice) has become a kind of norm amongst many small businesses in Australia’.^[1]

Mr Smith’s observation also appears to be true of sizeable corporate entities that employ vulnerable, low-waged workers, such as Dominos and Pizza Hut, and within the food processing industry, such as at the Baida Group, Australia’s largest chicken supplier.^[2]

In the case of 7-Eleven, a number of factors informed the contraventions. The franchisor-franchisee agreement (now-renegotiated) was so punitive that it compelled many franchisees to underpay staff, in order to make a profit. Moreover, many 7-Eleven employees were especially vulnerable to exploitation because they:

(a) possessed little understanding of Australian industrial law;

(b) were unaware of their entitlements;

(c) were not members of a union; and

(d) often spoke English as a second language.

While these issues contributed significantly to what appears to be one of the largest underpayment scandals in Australian industrial history, there are other equally important factors which underpin this conduct. Specifically, the obstacles to vulnerable workers recovering unpaid entitlements from prone-to-insolvency small businesses through complex and costly court processes and the uncertain application and hard-to-satisfy tests imposed by the accessorial liability provisions of the Fair Work Act 2009 (Cth) (the Act). While a private process for seeking compensation has been established by 7-Eleven Stores Pty Ltd in this instance, such schemes are no panacea for the legal deficits that this matter has exposed.

Fortunately, law reform is on the agenda and both the Australian Labor Party and the Greens have put forward concrete proposals for addressing some of these deficiencies.

Maurice Blackburn Lawyers has offered pro bono assistance to underpaid workers from the first reports of the scandal and continues to do so. This article explores the difficulties in recovering entitlements through our own experience of assisting 7-Eleven workers.

THE LEGAL BASIS OF THE CLAIMS

The media reports and our own investigations uncovered widespread prima facie contraventions of the terms of industrial instruments by 7-Eleven franchisees, particularly the clauses of industrial awards which stipulated minimum rates of pay and penalty loadings for working unsociable hours.

The relevant industrial instruments that cover most employees of these franchisees are the General Retail Industry Award 2010 and the Vehicle Manufacturing, Repair, Services and Retail Award 2010 (both modern awards) in addition to some isolated enterprise agreements.

The Act provides a mechanism to address such breaches. Section 45 makes contravening a term of a modern award unlawful. This provision is a civil remedy provision, which means that if contravened a penalty may be imposed on the person held liable ($10,800 for an individual and $54,000 for a corporation). However, the maximum penalty is rarely imposed and for large corporations, the current penalties are little deterrent. Section 545 of the Act allows workers to seek an underpayment order from a court of competent jurisdiction (typically the Federal Circuit Court) in respect of a failure to pay those amounts due to them under an industrial instrument.

OBSTACLES TO RECOVERING AGAINST FRANCHISEES INDIVIDUALLY

Nevertheless, a great number of obstacles essentially prevented 7-Eleven workers from pursuing franchisees individually.

Foremost is the cost and complexity of engaging in any formal court process. Underpaid workers in any industry rarely have the means to engage private legal representation to help them to negotiate court proceedings. As the Act is essentially a no-cost jurisdiction, where penalties are rarely awarded and are often low, private law firms cannot justify representing clients on a no-win, no-fee basis potentially eating into small settlements or court orders (as compared with a negligence claim).

Another key issue is the lack of documentary evidence that 7-Eleven workers have been able to produce to substantiate their claims. Many will have nothing more than a copy of their bank statement to provide evidence that they were, at some point in time, employed by 7-Eleven. Rosters, timesheets or payslips are often falsified by franchisees, or premised on false information.

While a discovery process might assist workers to uncover other documentary evidence of their claims, this information is also likely to have been deliberately and systematically falsified.

Union membership at a workplace such as 7-Eleven, whose workers are predominantly transient international students, was and continues to be very low. Difficulties organising such workforces, compounded by the hostility of the current federal government to trade unionism, have hindered unions from performing their traditional role in this instance.

Though there is a small claims jurisdiction in the Federal Circuit Court for workers seeking under $20,000 in unpaid entitlements, for employees of 7-Eleven for whom English is a second language, and who have little to no awareness of Australian industrial laws or our legal system, self-representation is simply not feasible.

Another critical obstacle is that many of the workers who have come forward are owed wages from time worked many years ago, often over the 6 year statutory limitation period for recovering underpayments of wages.^[3] For many, the formal statutory protections therefore offer no means of recovery.

Finally, as previous experience has demonstrated, franchisees rarely have the capital to meet the liabilities imposed by a court order. We are currently representing a number of 7-Eleven workers who were the beneficiaries of a court order against Bosen Pty Ltd, a 7-Eleven franchisee prosecuted by the Fair Work Ombudsman in 2008, which went insolvent before it met the entirety of the debt owing to its former employees.^[4]

In instances where the unpaid wages bill for some of these franchisees would exceed hundreds of thousands of dollars, it is unlikely that many would be able to meet a court order and remain solvent. Employees would then potentially be faced with the costly exercise of commencing insolvency proceedings to try to recover some of their entitlements through the entity’s liquidated assets.

The 7-Eleven matter has revealed a number of legal and practical obstacles facing low-paid, un-unionised workers in recovering wage underpayments from franchises individually.

ACCESSORIAL LIABILITY PROVISIONS

It quickly became apparent that we would need to represent these workers as a class and pursue an entity with sufficient capital to meet their unpaid entitlements. However, investigating a class action on behalf of these workers revealed the uncertainty concerning the scope of the Act’s accessorial liability provisions in circumstances where a franchisor is alleged to have been complicit in the unlawful conduct of a franchisee.

Section 550 of the Act provides that an individual or corporation will contravene civil remedy provisions where they are ‘involved in’ the contravention. This will only be found where a person has:

(a) aided, abetted, counselled or procured the contravention; or

(b) induced the contravention, whether by threats or promises or otherwise; or

(c) been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or

(d) conspired with others to effect the contravention.

On its face, there appeared to be no reason why 7-Eleven Stores Pty Ltd, as a franchisor body corporate, could not be held accessorily liable for contraventions of civil remedy provisions committed by its franchisees.

The Fair Work Ombudsman, in pursuing prosecutions against organisations in chains of contracts with those directly engaged in the contravention, had publicly expressed a somewhat equivocal view that:

‘The responsibility may extend up that chain of contracts, even to the very top organisation if that entity has directly or indirectly been in any way knowingly concerned with the conduct in question.’^[5]

On investigation, it became apparent that no action had previously been commenced against a franchisor for such contraventions. In United Voice v MDBR123 Pty Ltd [2014] FCA 1344, an individual who was the director of a franchisor was held to be accessorily liable for a contravention of the general protections provisions of the Act in counselling the termination of an employee. Nevertheless, the situation confronting employees of 7-Eleven franchisees was quite distinct.

Compounding the uncertainty of whether these provisions would apply were the tests to be met in order to make out the legal elements of the provisions. These elements required a level of knowledge and intent to be found on behalf of the entity involved in the contravention. As per the decision of Gray J in Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union v Beynon [2013] FCA 390:

‘The terms of s 550(2) of the Fair Work Act, concerning who is a person involved in a contravention, are familiar. They are the same as those... now found in s 75B of the Competition and Consumer Act 2010 (Cth)... the terms of which had been derived from the criminal law, required that a person involved be a person who participated with intent, based upon knowledge of the essential elements of the contravention. In relation to similar provisions in an industrial relations context, in Construction, Forestry, Mining and Energy Union v Clarke [2007] FCAFC 87 (2007) 164 IR 299 at [26], the Full Court said: Regardless of the precise words of the accessorial provision, such liability depends upon the accessory associating himself or herself with the contravening conduct - the accessory should be linked in purpose with the perpetrators.’^[6]

There was information available at this preliminary stage of our involvement in the matter, as per a Fairfax report that in 2015:

‘...over July and August 2015 7-Eleven's head office conducted a payroll compliance review of 225 stores.

It found that a staggering 69 per cent of stores had payroll compliance issues, including falsification of records and rosters in one month alone.

An insider says it would be even higher if all the stores' rosters had been cross-checked against CCTV footage.

The database also shows head office has been reviewing and finding wage fraud at its stores for at least the last 12 months.’^[7]

This suggested that, for at least 12 months prior to the review, the franchisor had been aware of at least some of the essential facts constituting the contraventions. It also did not have a practice or process in place for reporting franchisees to the Fair Work Ombudsman where wage fraud was uncovered.

It was possible that this level of knowledge was sufficient to demonstrate that the franchisor ‘deliberately abstained from obtaining knowledge by making an inquiry for fear that he may learn the truth’^[8] and was thereby wilfully blind to the contravention and could be found to be an intentional participant in the contravention.

Moreover, we believed that the unfair structure of franchise agreements could arguably represent a potential inducement to franchisees to contravene the terms of applicable industrial awards. Nevertheless, no ‘smoking gun’ concerning the knowledge of the franchisor emerged in public reports and the establishment of the private panel process (see below) following significant public and political pressure afforded an alternative means of recovering on behalf of these workers.

Faced with the risk attendant on commencing a large-scale class action on behalf of underpaid workers, using provisions that had not been used in this way previously, with no prospect of recovering costs and in circumstances where a private compensatory mechanism had been established, we opted to represent workers negotiating the panel process.

THE PANEL PROCESS

In an attempt to limit the public relations damage occasioned by the reports of widespread wage fraud, 7-Eleven Claims Pty Ltd established the Independent Franchisee Review and Staff Claims Panel (the Panel) on 3 September 2015.

Headed by two of 7-Eleven’s chief critics, Professor Allan Fels AO, former chair of the Australian Competition and Consumer Commission, and Professor David Cousins AM, former Consumer Affairs Victoria Director, ACCC commissioner and Prices Surveillance Authority chair, and a Secretariat staffed by Deloitte, a big four accountancy firm, the Panel has sought to make determinations on underpayment claims, submitted by affected workers, who are then paid by 7-Eleven Stores Pty Ltd.

A benefit for claimants of engaging in the Panel process is that no time limit has been imposed on claims allowing claimants who would otherwise have no statutory entitlement to recover unpaid wages to do so. Further, the standards of evidence required by the Panel are lower than those required by a court. Importantly, for claimants who have in many cases waited years to receive payments, the process has proven a relatively efficient way of compensating underpaid workers (at least compared with formal proceedings).^[9]

There are, however, clear deficiencies in this private process. Foremost is that without any statutory basis for the process, claimants to the Panel have no formal appeal rights to any external body. There is no requirement that written reasons be provided for decisions, and the Panel is not required to provide any information about its deliberative process. Unrepresented claimants in this process are effectively compelled to take the assessment of their claim by the Panel at face value.

Moreover, there is an inherent conflict of interest in a body exercising a quasi-judicial decision-making power determining claims against the entity that pays for its services. Finally, at any time, 7-Eleven Stores Pty Ltd may terminate the services of the Panel. Potential claimants would then be faced with pursuing their claims through the conventional means outlined above.

THE NEED FOR REFORM

Clearly, it is not desirable for private entities to be left to remedy the deficiencies in existing mechanisms for recovering wages, especially where establishing a claims process at all remains entirely discretionary.

A good outcome of this wages scandal has been increased public attention on the breadth of contraventions, which has triggered increased calls and proposals for law reform. While the federal government has, as at the time of writing, done little to address the scandal, both the Australian Labor Party and the Greens have put forward meaningful legislative reform proposals.

PROPOSALS FOR REFORM

In 2015, the Greens MP, Adam Bandt, tabled the Fair Work Amendment (Recovery of Unpaid Amounts for Franchisee Employees) Bill 2015 (Cth). The Bill was designed to create a scheme for employees of franchisees to recover directly against franchisors where unpaid entitlements, whether arising under contract, statute or an industrial instrument, were not met by a franchisee.

Essentially, where a worker issued a written demand to a franchisor for an unpaid entitlement, which was not met within the timeframe stipulated (no less than 14 days), the employee would be entitled to seek a court order for payment of that amount from the franchisor. In turn, the franchisor was able to recover this sum from the franchisee pursuant to the Act. Though worthwhile amendments, ultimately the Bill was not passed. It is unclear whether another attempt will be made by the Greens to pass similar legislation.

More recently, Hon Brendan O’Connor MP, Shadow Minister for Employment and Workplace Relations, has released an exposure draft of a private member’s bill titled the Fair Work Amendment (Protecting Australian Workers) Bill 2016 (Cth). Among its aims are to:

(a) clarify that the Act applies to all workers irrespective of their immigration status;

(b) require the Fair Work Information Statement to provide information relevant to migrant workers, and in relevant languages;

(c) prevent adverse action being taken against a worker who questions whether they are an employee or an independent contractor;

(d) strengthen the test for sham contracting;

(e) make Company Directors liable for wages owed to workers as a result of phoenixing;

(f) increase the penalty for companies (other than small businesses) which intentionally contravene provisions of the Act relating to terms and conditions of employment;

(g) allow company directors to be disqualified from managing corporations in relation to those contraventions; and

(h) introduce criminal offences for serious contraventions of the Act.

Our firm has welcomed these proposals and suggested some further amendments.

Critically, we have called for further clarity in respect of the application of the accessorial liability provisions in the Act. It is clear from the conduct of some principal contractors and franchisors, such as 7-Eleven, that despite a company not being technically engaged in contraventions of the Act, it has significant control over those companies that are engaged in contraventions.

In order to provide clarity, we propose the following be inserted at s550 of the Act:

‘Note: Accessorial liability can apply to contracting and franchising arrangements.’

The above amendment would not significantly alter parties’ rights and responsibilities under the Act, but it would clarify the effect of the provisions and may act as a further deterrent for companies encouraging and inciting unlawful conduct.

Beyond this, we have made concerted calls for further information to be provided for new arrivals to our country about their rights at work, on arrival and in higher education institutions, where many of them have been exploited study.

CONCLUSION

The 7-Eleven scandal has exposed the pervasive exploitation occurring in Australian workplaces. Moreover, it has demonstrated the inadequacy of existing laws and processes for dealing with widespread wage fraud, especially where vulnerable migrants are its victims.

Hearteningly, strong proposals for legislative reform have been proposed to redress some of these issues. It is our hope that parliamentarians take action to ensure a scandal of this scale never occurs again.

Author’s Note: On 27 May 2016, 7-Eleven announced the establishment of the 7-Eleven Wage Repayment Program to replace the Independent Franchisee Claims Review Panel (which has recently been dissolved). As of writing, it is unclear what implications this new process will have for claims that have already been submitted and those that are to be submitted.

Giri Sivaraman is a principal in Employment and Industrial law at Maurice Blackburn. He is an accredited specialist in employment law in QLD and NSW and rated as a leading employment lawyer in the Doyles Guide. @GiriDSivaraman

Patrick Turner is an Employment and Industrial lawyer with Maurice Blackburn Lawyers who has performed extensive work on the 7-Eleven matter. He also represents trade unions and private clients in employment and industrial disputes.

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^[1] Senate Education and Employment References Committee, ‘Australia's temporary work visa programs’, Hansard, 20, 5 February 2016.

^[2] David Marin-Guzman, ‘Domino’s Pizza drivers missing out on penalty rates, casual loading’, Workforce Daily, 26 November 2015. Accessible at: http://sites.thomsonreuters.com.au/workplace/2015/11/26/dominos-pizza-drivers-missing-out-on-penalty-rates-casual-loading/; Adele Ferguson and Sarah Danckert, ‘Wage fraud: Pizza Hut franchisees using ‘sham’ contracts to underpay drivers’, Sydney Morning Herald, 23 November 2015. Accessible at: http://www.smh.com.au/business/retail/wage-fraud-pizza-hut-franchisees-using-sham-contracts-to-underpay-drivers-20151120-gl3p7q.html; Jason Om, ‘Foreign workers exploited at Baiada chicken processing plants: Fair Work Ombudsman finds’, ABC News, 18 June 2015. Accessible at: http://www.abc.net.au/news/2015-06-17/foreign-workers-exploited-at-baiada-plant-investigation-reveals/6554570.

^[3] See s545(5) of the Act.

^[4] For the decision on the penalty, see Fair Work Ombudsman v Bosen Pty Ltd [2011] VMC 81.

^[5] Natalie James, ‘Risk, Reputation and Responsibility’, speech to the Australian Labour and Employment Relations 2014 National Conference. Accessible at: www.fairwork.gov.au/About-us/news-and-media-releases/speeches.

^[6] At [48].

^[7] Adele Ferguson and Sarah Danckert, ‘7-Eleven: wage fraud cover-up from head office’, Sydney Morning Herald, 31 August 2015. Accessible at: http://www.smh.com.au/business/workplace-relations/7eleven-wage-fraud-coverup-from-head-office-20150828-gjahrc.html.

^[8] Mason J in Giorgianni v R [1985] HCA 29 at [18].

^[9] We note that those applying to the compensation scheme set up by the Commonwealth Bank have had a very different experience; see Adele Ferguson, ‘CBA's glacial compensation scheme’, Sydney Morning Herald, 3 October 2015. Accessible at: http://www.smh.com.au/business/banking-and-finance/cbas-glacial-compensation-scheme-20151001-gjzehi.html.