Franchisors face raft of class actions

Two of the major franchisors embroiled in federal government inquiries into the franchising sector and underpayment of wages and entitlements to workers are now before the courts in class action proceedings.

Just weeks after law firm Corrs Chambers Westgarth announced it was close to launching proceedings against Retail Food Group, Phi Finney McDonald has indicated it is taking Domino’s Pizza Enterprises to court.

Class actions have also been launched against two other retail groups, 7-Eleven Stores and The Thorn Group. 

The Thorn Group, which recently announced store closures in South Australia, is defending a class action brought on behalf of consumers over its financial services.

Law firm Levitt Robinson, on behalf of Davaria Pty Ltd, commenced a class action in the Federal Court of Australia against 7-Eleven Stores Pty Ltd, 7-Eleven Inc, the US owner of the franchise system, and the ANZ Bank in July last year.

ANZ is understood to have extricated itself from the proceedings after reaching an agreement without any compensation settlement.

The Levitt Robinson action on behalf of franchisees with claims based on misleading and deceptive conduct and unconscionable conduct by 7-Eleven  initially enjoined ANZ Bank for alleged irresponsible lending practices.

The Retail Food Group class action is one of a series of legal disputes, which include potential actions by regulators for breaches of competition laws and provisions in the franchising code of conduct, following revelations in the 2018 Senate committee inquiry into the franchising sector.

Expected to be funded by a British litigation funder, Augusta, the Corrs Chambers Westgarth action is based primarily on breaches of the Consumer Law Act which have resulted in losses for franchisees.

The litigation is based on the experience of former and existing Michel’s Patisserie franchisees but could be extended to Retail Food Group franchisees in its other brands such as Gloria Jean’s, Brumby’s, Pizza Capers, Crust and Donut King.

Domino’s is also facing potential legal action involving regulators and franchisees, however, its class action is pursuing claims on behalf of employees of franchise outlets.

Funded by Therium Litigation Finance, the Domino’s case is more complex than the 7-Eleven and Retail Food Group proceedings, which will test issues between the franchisor and franchisees.

The Domino’s case could be expected to test the contentious definition of contractors in respect of delivery drivers engaged by franchisees and the advice and instructions given to franchisees by the franchisor on workplace laws and employee wages and entitlements.

Domino’s has already been marked down by analysts at Morgan Stanley because of the uncertainty around the class action and other potential legal proceedings and an expectation of lower earnings in the next three years.

The expected profit squeeze is attributed to higher employee costs going forward and a slowdown in new store openings by Domino’s.

The company’s share price is at its lowest mark for four years as investors become more concerned about the legal fallout from Domino’s franchisee management and support and any culpability it has for the underpayment of drivers and workers in franchised stores.

Analysts at Citigroup estimate the cost of class action could be as high as $240 million, with the proceedings covering tens of thousands of employees, according to the Retail and Fast Food Workers Union.

The Domino’s class action brought before the Federal Court covers an almost five-year period from June 24, 2013 to January 2018.

In a statement to the Australian Securities Exchange confirming the legal action, Domino’s said it did not mislead its franchisees on their obligations as employers and will defend the class action.

The company said in its statement that employees were paid according to a series of industrial instruments that were lawful, valid and applicable at the time.

The company also noted that the class action had not specified a quantity of losses to be claimed in the documents it had received from Phi Finney McDonald.

While the class actions and prosecutions by the Fair Work Ombudsman have identified both deliberate and inadvertent underpayment of workers in the retail industry, the former head of that office contends the wages system is too complex.

Natalie James, who is now a partner at Deloitte, said the system needs to be reviewed because the complexity of the wages system’s awards and enterprise bargaining agreements was contributing to instances of underpayment of employees in some instances.