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Recent Scandals Further Scarring the Beleaguered Franchise Sector

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By Esther Gutnick, Senior Associate, MST Lawyers

In addition to the much-publicised inquiry by the Parliamentary Joint Committee on Corporations and Financial Services and the resultant Fairness in Franchising Report handed down in March 2019, the franchising sector has continued to attract considerable media attention in recent months.

Several scandals involving different franchise brands have made headlines lately. Following is a summary of some of the more infamous franchise news stories including Michel’s Patisserie, Chatime and JUMP! Swim Schools.

Michel’s Patisserie

Embattled multi-brand franchisor Retail Food Group (RFG), who attracted much scrutiny and criticism in the Parliamentary Joint Committee’s Fairness in Franchising Report, is again under fire, this time in relation to food safety at its Michel’s Patisserie chain.

Recent media reports claim that, based on leaked memoranda issued by RFG to its Michel’s Patisserie franchisees, the bakery chain has been artificially extending the “use by” dates of certain food items, thereby deliberately forcing its franchisees to sell out of date products to customers.

RFG has since admitted orchestrating the use-by date extensions, but claimed that the extensions, which were requested of less than 1% of its 1,000 suppliers, were approved by the relevant suppliers and that RFG has since taken voluntary action to withdraw any affected products from sale.

The chain, including some of the suppliers of the products in question, will now reportedly be subject to a food safety investigation.

An RFG spokesperson further stated that RFG would “fully co-operate in the best interests of consumers” if it is contacted by regulators regarding any concerns with food safety standards and that it would “remove any supplier from its network if they are deemed to have contravened relevant food safety regulations”.

Chatime

Bubble tea and beverage franchise Chatime hit the headlines for alleged long-term and systemic underpayment of staff in both corporate-owned and franchised stores, with an estimated $10 million or more reportedly owed to employees across the network.

Media reports accused the chain of deliberate wage fraud and claimed that Chatime had received a formal complaint from the Fair Work Ombudsman (FWO) last year, following an audit of its company-owned stores which revealed significant underpayments to some 150 staff.

In response, Chatime released statements including the following comments:

“We recognise that underpayments are a serious issue impacting the franchise industry. As a responsible employer in Australia, we are committed to paying our people correctly and if underpayments are identified, we are committed to rectifying those underpayments.”

“We have worked tirelessly over the past number of years to get it right and do what it is right. We have taken a number of proactive steps to work co-operatively and transparently with employees to remedy any concerns, and we will unreservedly apologise if or when we get it wrong”.

Those steps included conducting national roadshows to educate franchisees on Modern Award compliance, recruiting an HR specialist and updating terms and conditions of employment for fast food employees to ensure Award compliance.

Chatime further stated that, in the past, some of its business systems and payroll capabilities had not kept pace with the rapid growth of the Chatime brand in Australia and the complexities of the Australian regulatory environment.

The chain purportedly implemented a new payroll rostering, time and attendance system throughout its franchise network to provide the franchisor with some oversight into franchisee compliance.

The FWO refused to respond to media assertions that Chatime’s Australian subsidiary, Infinite Plus Pty Ltd, is currently under investigation by the FWO.  

However, the FWO commenced legal action in the Federal Circuit Court in April 2019 against a former Chatime franchisee in Sydney, alleging that between January and November 2017 it underpaid 17 workers, mostly international students on visas, by a total amount of over $46,000.  The FWO also instigated court action against the franchisee’s directors for their alleged involvement in the underpayments.

The ombudsman commented that it had undertaken a broader investigation into other bubble tea operators, including GongCha, which has more than 55 stores in Australia, and smaller operator Sharetea, both of whom offer franchises.

An FWO spokesperson also divulged that the FWO is investigating the rapid establishment and expansion of overseas franchise chains operating in Australia.

JUMP! Swim Schools

The Jump! Swim Schools franchise (Jump!) is under investigation by the Australian Competition and Consumer Commission (ACCC), following substantial media coverage, independent submissions received by the regulatory body and a request from the Franchise Council of Australia (FCA).

The Small Business and Family Enterprise Ombudsman (SBFEO), whose office provides independent mediation services, also confirmed that there are more than 40 cases currently under review involving Jump!.

Several franchisees have come forward with similar complaints against Jump!, alleging that, despite signing franchise agreements and paying hefty sums in franchise fees and rental payments, the franchisor has failed to finalise construction and deliver the promised swim schools, in some cases even after two years of delays.

A director of the franchisor admitted that more than 80 franchisees are still waiting for their swim schools.

Some of the affected franchisees have managed to terminate their franchise agreements with Jump!, but reportedly only after suffering significant financial losses. 

A couple of franchisees have already brought proceedings against the franchisor, with varying degrees of success.

In April, Victorian Supreme Court Justice John Digby found in favour of franchisees Todd and Jenelle Delahunt in proceedings they brought against Jump!, granting an injunction compelling Jump! to relinquish possession and operation of the swimming school which the franchisor had assumed possession of over a financial dispute for the sum of $30,753.

However, on 9 May 2019, after a four day hearing in the District Court of NSW, Judge Abadee found against former franchisee Shaun Trumbull, ruling that despite the financial burden he had incurred, Trumbull had not satisfactorily established a case for misleading conduct, and was accordingly not entitled to damages.

Mr Trumbull will now be liable to pay the costs of the case, in addition to his losses that exceed $160,000, more than three years after initially signing franchise agreements in March 2016.

Many other accusations against Jump! of financial losses and build delays are still pending.

It has also been reported that “a string of contractors and tradies” in Western Australia, Victoria, and Queensland are in dispute with the franchise over its alleged failure to make payment for building work and services provided.

A spokesperson for Jump! was quoted in February 2019 as saying that the franchise welcomed a review by the ACCC, and that, although the build delays were the result of tightening regulations and the need for third party approval, the franchisor “recognise[s] the need to revise the site selection and build process”. The spokesperson further stated that:

“Upon review, we will be changing our model entirely to fix what has sadly become a frustrating startup process for many of our franchisees. It’s a complicated process that some of our most successful franchisees have been through with no exception. We’ve been navigating it internally for some time looking for better systems.”

* At the time of publication, Fairfax Media has reported that Swim Loops Pty Ltd, the entity in charge of the JUMP! Swim Schools franchise has gone into voluntary administration.

Conclusion

It is clear that the franchise industry remains under severe scrutiny from the press, the public and participants within the sector.  The ACCC continues its pursuit of ongoing compliance with the Franchising Code of Conduct and its current focus on the café, restaurant and takeaway food services industries. The FWO has also confirmed its ongoing commitment to ensuring compliance with workplace laws, including by conducting surprise audits, in the fast food, restaurants and café sector which is heavily comprised of franchise chains.

In this climate, it is imperative for both franchisors and franchisees to ensure that they comply with all applicable laws.  Otherwise, they risk not only the possibility of being the subject of an investigation by a regulatory body, the recipient of a penalty infringement and/or the defendant of legal proceedings, but also the possibility of becoming the next notorious headline.

If you would like to speak to our Franchise Law team about anything printed in this article, email us or call us on + 61 3 8540 0200.