A cautionary tale for Australia’s migrant community

by Molina Asthana
(B.Com, LLB, LLM)Principal, Swarup Asthana Lawyers and Business Advisors

We all know that in Australia, migrants make up the fabric of our society and contribute significantly to the economy as well.  The Scanlon Foundation Report 2019 recorded the following statistics:

1. The population growth of Australia in the recent years is constituted more by overseas migration which constitutes over 60% of the population increase as compared to natural increase which is less than 40%.
2. In 2016 the overseas-born residents of Australia totalled 6.87 million, comprising 28% of the population, the highest overseas-born proportion in OECD countries with populations in excess of ten million. In addition, 21% of the Australia-born population have one or both parents born overseas, so that in 2016 half the population was either first or second generation.
3. Australia’s immigrants are increasingly drawn from the Asian region: in 2017-18, of permanent additions to the population 33,310 were born in India, 25,145 in China, and only  13,654 in the United Kingdom.

Many of the Asian migrant communities are aspirational and want a better lifestyle for themselves and their families. They may have humble beginnings as international students and work hard doing low paid jobs that others don’t want to do, often at a risk to their safety, such as driving cabs, working at service stations and supermarkets late at night.

Some may even face language barriers and others face discrimination. However this does not dampen their spirits and they are enterprising enough to start their own business, whether it be buying the cabs they drove or running the service station, restaurants, cleaning business or security services where they once worked.

Often it takes years of saving and working both day and night shifts in insecure jobs coupled with large borrowings to invest in a business.  Franchise businesses are particularly attractive to migrants as they appear to be a successful model for a secure income, particularly if it is a reputable brand like Subway, McDonalds, or a 7-Eleven store. Sometimes seeing the outward success of fellow immigrants owning these franchises, lures them to go down the same path.

WHAT IS A FRANCHISE?

A franchise is effectively a ‘ready made’ business model with a good track record. This makes it attractive to new Australians who recognise they may not have the domestic business acumen and award knowledge to run a profitable and compliant business in Australia.

“Franchising gives lots of Australians the opportunity to grow and be part of our economy, but with that comes an almost inherent imbalance of power,”

• Small Business and Family Enterprise Ombudsman (the SBFEO), Kate Carnell.

Indeed, the 2019 Parliamentary Report entitled “The operation and effectiveness of the Franchising Code of Conduct” recommends legislative reform in order to:

1. Combat the disparity of power between franchisors and franchisees.
2. Overcome “socio-cultural” problems, which stem from language barriers; disparity of power and lack of knowledge.
3. To ensure franchise agreements are fair and legally compliant.

MIGRANT VULNERABILITY

Many migrants are unfamiliar with business practices and laws in Australia, in particular the Franchising Code applicable to franchises or their rights in relation to the franchise. Language and cultural barriers exacerbate the problem. They may also lack understanding of the lopsided nature of the contracts in favour of the franchisor and the many levers built into the contract which enable the Franchisor to exercise control, shift the financial burden on the franchisee and take over/terminate for various reasons.

Though it is mandatory for the franchisor to provide the franchisee with a copy of the Code of Conduct as well as disclosure documents and for the franchisee to obtain legal advice, many franchisees think of this as just a formality and do not necessarily heed attention to the onerous provisions in the Contract. Coupled with the fact that they have very little bargaining power against big conglomerates, leaves them in a particularly vulnerable situation.

Most of the franchise agreements as well as manuals, directions and rules thereunder or in pursuant to, impose unreasonable and unfair conditions on franchisees. This has been highlighted in the 7-Eleven class action where Franchisees have alleged breach of contract, no proper accounting of the marketing fund, misleading and deceptive conduct and unconscionable conduct. In the past there have been claims made against Red Rooster, Caltex and United Petroleum where many franchisees were in distress due to the poor business models of these Franchisors. It is well documented now how the vulnerability of migrants is exploited by the unscrupulous Franchisors.

FINANCIAL IMPACT

The many obligations imposed on the franchisee may lead to a non-profitable business and financial ruin for a migrant who may have borrowed money from private sources providing their homes as security, being personal guarantors on these loans and paying a very high interest rate. The franchisees also have a number of misconceptions in relation to the franchisor including that the franchisor has fulfilled all their obligations in relation to workplace laws or that any directions received from the franchisor cannot be challenged even if they are not in line with the contract.

Where a franchisee wants to individually initiate legal challenge, the economic disparity makes it very difficult for the franchisee to sustain the proceedings. Resale is also not easy as often the goodwill is sold at an inflated price in the first place and it is difficult to find a buyer for a reasonable price at short notice.

These issues make it almost impossible for franchisees to exit the Franchise agreement despite facing severe financial hardship. Quite often they find themselves cornered into engaging in practices that may not withhold legal scrutiny, just to stay afloat and fulfil their obligations under the franchise agreement.

SUMMATION

In short, this article is to warn migrants into entering into franchise agreements without fully understanding their legal rights and obligations, to be wary of arm-twisting tactics of Franchisors and to fully understand the financial implications of entering into Franchise Agreements.  Where necessary they should seek advice from lawyers and accountants, do their market research and not take undue financial burden.

If you, or someone you know is facing any of the hardships addressed in this article please don’t hesitate to look into the current class action against 7-Eleven via the link below.