‘We are very focussed on the muffins’: product trumps employment matters in franchises

Dr Ashlea Kellner

A 2012 report from The Franchise Council of Australia highlights around 700 000 people to be employed by franchises nationally. Interestingly though, only one third of franchisors employed human resources (HR) or industrial relations (IR) professionals, or provided access to such advice for franchisees; nor did they conduct internal audits into how franchisees executed employment processes in their operations.

A team of WOW researchers, led by Research Fellow, Dr Ashlea Kellner, have considered how the franchise model influences the way people are managed in Australian cafe sector franchises. Conducting interviews between 2009 — 2011, the team (which includes Ashlea’s PhD thesis supervisors, Associate Professor Keith Townsend, and Professors Adrian Wilkinson and David Peetz) undertook case studies with three market-dominant Australian-owned food service franchises to determine the role of franchisor control, compliance monitoring and responses to franchisee misconduct relating to their industrial relations (IR) obligations.

Taking a step back, we asked Ashlea to first explain how the franchisor-franchisee relationship works:

“A franchisor owns and controls a brand while the franchisee owns and operates the (typically small or medium-sized) business. The support that the former provides the latter can vary, but it typically includes a full system for business operations.”

Such an arrangement has its pros and cons, Dr Kellner adds:

“Efficiencies and consistency of the product (such as the eponymous ‘muffins’) arise from greater control and intervention from the franchisor, but result in decreased franchisee autonomy. However, too much autonomy can lead to franchisees misbehaving. This is the case in franchises; agreements that specifically address in detail a franchisee’s responsibility in the area of employment relations are uncommon.”

Could a higher level of compliance to IR come with more franchisor control?

Although many things contribute to how a franchisee operationalises its industrial relations obligations, the view that they work in the best interests of the franchisor, and that both seek to ensure the success of the franchisee’s business, does not always play out. Particularly, where opportunistic behaviour of the latter prevails in their strive for profit, and the former seeks to maximise turnover and preserve the brand:

“…high rates of compliance with IR standards become unlikely in a business model that uses the advantages of control over product and processes of a large organisation, with the low-wage and low-compliance model of small business. Findings from our case studies support this,” says Dr Kellner.

In the three case studies, low levels of franchisor IR involvement was present at the same time as high instances of misconduct — both intentional and unintentional — which were represented by interviewees as the consequence of misinterpretation or oversight of their responsibilities, and/ or a lack of franchisor support in this area.

How was IR compliance monitored and how did the franchisor respond to franchisee misconduct around this issue?

Previous studies report that non-compliance by businesses to IR obligations is generally a purposeful decision prompted usually by intense competition, non-unionisation, under-resourced agencies of enforcement, and the precarious nature of work of those they employ e.g. youth, female.

Franchisors in all three of Ashlea’s case studies reported a clear understanding of what constituted, and were the consequences of, critical breaches (relating to regulation or legislative compliance), compared with the far less serious nature of non-critical breaches (relating to company-specific guidelines or recommendations). Most topically too, because franchisors tend to deflect the responsibility for breaches of industrial relations law onto the franchisee, the underlying threat of terminating the franchisee agreement was seen as a major deterrent in franchisees engaging in negative, opportunistic behaviour.

Did differentiating the risks between preserving the product/ brand reputation and labour compliance explain franchisees’ responses to enacting their IR obligations?

The team found that it was in the best interest of the franchisor to maintain tight control over the areas of product quality and labour conditions because, unlike other small and medium sizes businesses, both parties are accountable to the customer for the product. Whilst franchisees were found to continue focussing their resources on maintaining product quality rather than IR compliance, by disassociating themselves from the legal and moral accountabilities of misbehaving franchisees, franchisors also relied on administering heavy penalties to bring franchisees into IR compliance.

In concluding, Dr Kellner called for more research into the global context under which franchises operate in an effort to better understand IR within in them. And of the three Australian case studies, says Ashlea:

“To franchisors, ‘good IR’ was exhibited by a lack of known indiscretions [about employment matters]. They were more focussed on the muffins [the product] – on the internal regulation of product quality – than on IR.”