Why franchisees underpay staff and how to halt the bad behaviour

Why are franchisees underpaying staff? Are these workplace breaches a result of unprofitable franchise systems, franchisee greed or simple mistakes?

One of the primary drivers for franchisees to underpay staff is a relatively high minimum wage, suggested forensic accountant Siobhan Hennessy, a partner at PPB Advisory, speaking at a panel discussion in Sydney.

“When you look at a franchise model, often the only area a franchisee has left to tweak is the labour cost and that’s a considerable cost in the business.”

Hennessy pointed out that franchisees are also faced with complex labour rates to implement.

“The awards system is quite complicated. Ask three lawyers and you’ll get three different responses,” she said.

Fellow panellist Kate Groom at SmartFranchise pointed out that franchisors typically leave payroll detail to franchisees.

“If you leave things to the franchisee they might listen to their neighbour, to someone in the pub, ask an accountant (who might be an unreliable source if they have no franchising expertise).

“In the absence of information about wages averages, they think paying less is better – more profit is better, but sometimes it’s not. You’re just guessing at your payroll, how many staff to put on, based on some mythical benchmark. Many franchisees don’t know enough to run a business.”

Some of the more visible systems in payroll, issues around profitablity, relate to the fundamental structure of the model. Some start-up costs are so bloated, franchisees are struggling to make a business work.

What can franchisors do?

Questioning the structure of the franchise model and who is getting what share of the pie is a starting point. If this is on track, then investigate ways to assist franchisees to correctly manage payroll.

“Franchisors should be helping find practical, tech based solutions for franchisees to get payments right. It helps you and really helps franchisees,” Groom said.

Getting payments right takes away some of the costs of compliance. Access to information about the staff and the wages paid can help businesses improve labour usage, saving up to six percentage points in some businesses, she said.

Hennessy believes franchisees may need more support and structure in setting up the business.

"It’s important to understand who your franchisees are – onboarding is important, check if they’ve had businesses and been in trouble before (someone can be a repeat underpayer) – review the training process."