In an attempt to take control of the situation and douse the public backlash, head office set up a compensation scheme, agreed to change its profit share model, triple income support to struggling stores and refund fees to any franchisee who wanted to exit the network. 7-Eleven founder and former chairman Russ Withers, left, and former general manager operations Natalie Dalbo faced a Senate grilling. Credit:Wayne Taylor If head office thought this would quell the unrest among the franchisees, fix systemic wage exploitation and restore public trust, it was badly mistaken. Curry Club rebellion The so-called "Curry Club", a group of high powered franchisees who regularly hosted dinners at their houses with senior executives at 7-Eleven, felt betrayed.

So did the other franchisees who had been underpaying workers for years. They resented the "mock outrage" of head office regarding systemic worker exploitation that had been exposed in a joint investigation by Fairfax Media and Four Corners. A 7-Eleven senior executive referring publicly to the franchisees being "greedy" fuelled their rage further. By October 8 franchisees had united and formed an association, the 7-Eleven Franchisees Association, appointing five powerful multi-store franchisees to the board, including Azhar Mufti as chairman. Their aim was to represent a united front to head office as they thrashed out details of a new business model and variation of the standard franchise agreement.

Splits emerge Workers, most of them international students on visas, had had enough of the systemic wage fraud. Credit:Arsineh Houspian Some of the franchisees have since splintered into factions that reflect their different interests – fuel stores, non-fuel stores, small stores in quiet locations, stores in busy locations and franchisees with multiple stores – in preparation for the showdown. We are stressed. We can't sleep. We don't know for sure what's the best way to go at the moment. Azhar Mufti, 7-Eleven Franchisees Association chairman. On November 30 franchisees will need to decide whether to bring in the lawyers as a precursor to a class action, or sign up to a new business profit sharing agreement, in return for indemnifying head office and the US from payroll issues.

Pressure is also mounting on the family behind the 7-Eleven chain in Australia. If head office doesn't get the franchisees to sign the agreement, co-founders Russ Withers and his sister Bev Barlow's $1.5 billion business empire could implode. The stakes are high. On the upside, signing the new business deal means franchisees will be given a new profit sharing deal, with an up front sum as the deal will be backdated to September 1. It will also restore stability to the 7-Eleven network and with it the hope that the banks will start lending to franchisees again – which will enable the sellers to sell. But a lack of trust between head office and the franchisees has created an atmosphere where the franchisees are concerned that the deal isn't what it seems.

New agreement is a 'death warrant' Lawyer Stewart Levitt likens the new business agreement to signing a death warrant. Credit:Andrew Quilty This was no better demonstrated than head office's tripling of income support to franchisees being interpreted as a short term ploy, with the ultimate goal to find reasons to either terminate the franchise contracts in the unprofitable stores or buy them back. Sydney-based lawyer Stewart Levitt of Levitt Robinson likens the new business agreement to signing a death warrant. The new business model is no longer a one-size-fits-all profit split of 57 per cent to head office and 43 per cent to franchisees.

Now, for stores generating below a certain amount of income, the profit split will be 50:50. For stores with petrol stations attached the commission has been increased from 1 cent per litre to 1.5 cents per litre. "We don't have much time. I expect we will make a decision by Monday," says Mufti, who owns three 7-Eleven stores and Mufti Finance Corporation, which holds a credit licence. He says most of the members don't want to sign the new agreement in its current form. "We are stressed. We can't sleep. We don't know for sure what's the best way to go at the moment … This is very hard. It's very hard."

Head office needs to accept responsibility 7-Eleven founder Russ Withers has been in damage control since the worker exploitation scandal broke. Credit:Wayne Taylor Levitt has been on a roadshow for the past couple of weeks, speaking to hundreds of franchisees. He estimates at least 180 franchisees will instruct him to kick-start "genuine bi-partite" negotiations. "Head office has to accept its major share of responsibility – not scapegoat the franchisees, whom it had mostly set up to fail and who have, in the past, clung onto the hope of reselling their stores at a profit to the next generation of 'suckers'- funded with sweetheart loans from a bank with a special relationship with head office," he says. Levitt says if 7-Eleven doesn't negotiate in good faith, a class action would be filed against head office in Australia and the United States.

"We have not yet decided whether to bring the action here or in the US, where massive punitive damages may be available," he said. Levitt says he has lined up a US-based litigation funder. Indemnity too broad A lack of trust has created an atmosphere where the franchisees are concerned that the deal isn't what it seems. Credit:Simon Bosch The main concern is the indemnity head office is seeking is too great. "This, as well as the fact that the value of the goodwill on these stores has collapsed by more than 50 per cent and these franchisees could face a huge bill for back pay, it isn't viable" he says.

"It isn't a fair deal." A "variation of the franchise agreement", obtained by BusinessDay, says: "The franchisee shall indemnify and hold SEA [7-Eleven Australia] and SEI [7-Eleven Inc] harmless from liability for any representations by, and for any loss or damage caused by any act or omission of the franchisee or the franchisee's agents, representatives, servants, employees or invitees, including but not limited to any liability for payment of Employee wages and other entitlements which accrues or accrued anytime during the term of this agreement in connection with the franchisee's operation of the store, including where SEA effects payment of wages or other entitlements to an employee in order to rectify an underpayment and irrespective of whether the agreement has been terminated." In recent days the 7-Eleven Franchisees Association has been hitting the phones hard, campaigning to the franchisees. Some franchisees say they have been bullied and intimidated. Head office, for its part, has been meeting with individual franchisees, the association and groups in an attempt to convince them that signing the deal will give them a fairer profit split and provide financial relief to the stores that need it. It wants to put the scandal behind it and believes the new arrangement is the only way.

Back pay a key sticking point A whistleblower at 7-Eleven head office says he is familiar with the new deal and believes it is fair. But he says the issue of back pay needs to be cleared up. "7-Eleven's current position of going after franchisees for back pay will be taken on a case-by-case basis is rubbish. The franchisees need certainty," he says. After the scandal broke, 7-Eleven set up the Fels Wage Fairness Panel, to review claims of underpayment. Head office agreed to pay the exploited workers and then chase the franchisees for repayment.

Given wage fraud was systemic, all franchisees are concerned at the potential liability they are facing. The Fels panel has made determinations on 101 claims, worth more than $2.3 million. Some estimate the final bill could reach $300 million, depending on the effectiveness of the panel and the government's stance on granting amnesty to workers. Franchisees believe they should not have to repay workers on the basis the model was flawed and as Professor Fels said at the outset of the scandal: "the only way a franchisee can make a go of it in most cases is by underpaying wages, by illegal behaviour". Thin profits on offer

Almost 140 stores delivered a gross income to franchisees of less than $300,000 in the year to June 2015. To put it into perspective, at June 2015, Almost 140 stores delivered a gross income to franchisees of less than $300,000 in the year to June 2015 and a little over 50 stores earned less than $250,000. The average wage bill for a store with one person operating at any one time is more than $220,000. Add in other costs, including interest payments and the store is in the red. Some franchisees in more popular locations did earn enough to pay wages, but chose not to. An estimated 31 stores delivered a total income to franchisees of more than $600,000. Many of these franchisees got rich off the back of vulnerable workers. Nevertheless, the potential price tag of the back pay – and who is culpable – is a sticking point for franchisees.

The franchisees argue that everyone knew about the half-pay scam, including head office, which managed the payroll for franchisees and conducted regular audits. Underpaying workers was how the model worked. Galling claims They found it galling when the scandal broke and head office pleaded ignorance. Their anger intensified when senior management told district managers to "go your hardest" on the franchisees. Days after the scandal broke, district managers were crawling through each store's payroll records. They were also demanding CCTV footage to cross check rosters and anything else that might point to wage exploitation.

The franchisees were given an ultimatum: 14 days to fix their payroll or face a breach report and possible termination. Some franchisees threatened to sell up, others threatened to strike or picket the company's head office in the outer eastern Melbourne suburb of Mount Waverley. At least one franchisee on the Gold Coast abandoned his store and flew home to China. Head office realised it had gone too far and tried to soothe franchisees at meetings in Melbourne, Sydney and Brisbane. Their pitch to franchisees that the scandal had been hard for head office too was met with jeers. Not even the resignations of 7-Eleven founder and billionaire Russ Withers, long-time chief executive Warren Wilmot and general manager operations Natalie Dalbo could pacify the franchisees. When head office agreed to boost financial support to stores earning less than $310,000 a year, franchisees feared it was a precursor to kicking them out of the network when their 10-year contract is up.

Discount campaigns attacked Some of 7-Eleven's social media posts have copped criticism. Resentment that had been bubbling away for years, has surfaced. Some are angry at 7-Eleven's seemingly relentless discount campaigns, the latest being the "epic", which is designed to get customers back into the shops. "Customers want savings so 7-Eleven is giving them epic savings," a Brisbane-based franchisee said. "Go shop in 7-Eleven and see how much you get for $10 and how 7-Eleven is killing good competitive market, and franchisees," he says. The discounts are running across a variety of merchandise, including meat pies, which are selling for $2, bottled water for $1 and deeply discounted confectionary and soft drinks.

One Melbourne-based franchisee says he wants the outside world to know "we are slave labourers too, I earn less than $10 per hour." The problem for 7-Eleven is the future of the stores. Franchisees have sunk hundreds of millions of dollars into buying a 10-year franchise agreement, with costs varying between $400,000 and $1.7 million depending on the location and whether a petrol station is attached. Financing difficult The scandal has slashed the value and made it difficult to sell after the banks, excluding CBA's BankWest, imposed a lending freeze to new 7-Eleven franchisees.

There are at least 90 stores for sale across Australia, which is almost double the number before the scandal broke. "Stop dreaming about selling your business," a Melbourne-based franchisee said. "There is such much negative news out there. Persecution from the government and head office so no one dares to sign up for at the least the next few years. We are stranded on a pirate ship." Managing the relationship between head office and the franchisees has become a difficult balancing act. With the Fair Work Ombudsman breathing down its neck, not to mention the public glare and a senate inquiry, 7-Eleven wants to be seen to be doing the right thing. Sometimes that has upset its already fragile relationship with the franchisees.

Terminations have gone quiet 7-Eleven founder and former chairman Russ Withers, left, and former general manager operations Natalie Dalbo faced a Senate grilling. Credit:Wayne Taylor When it terminated franchisees in early October, it sent shockwaves through the 7-Eleven system, with many franchisees believing it was a breach of trust. Since then, terminations have gone quiet. Franchisees fear that if they sign the deal, breaches and terminations will come thick and fast. But as evidence emerges that a new wage scam is in operation, known as the cash scam, 7-Eleven needs to take a hardline on franchisees or else fall back into the same wilful blindness that landed it in so much trouble.

The cash scam revolves around employees receiving the correct wages in their bank accounts for the hours worked then pay half of it back to the franchisee in cash, away from the surveillance cameras that operate in most of the 620 stores. If they refuse, they lose their job and are threatened with deportation. According to one Sydney-based employee, the cash is collected outside the store by a representative of the franchisee. Consumer advocate Michael Fraser, who reported worker exploitation to head office more than two years ago, says many workers have come to him complaining of the new scam. "Exposing the half-pay scam gave way to the more disturbing cash back scam, which is now rampant through stores across Australia and only detectable if reported by staff," he says. "Franchisees trying to do the right thing should be embraced, and the others should be ejected from the business. Only four reported terminations so far makes me wonder if 7-Eleven and the government are doing enough to stop this travesty?"

Underpayment in any form 'unacceptable' 7-Eleven is well aware of the cash back scam. In a statement it said it had raised the issue of cash back with the Fair Work Ombudsman and the Fels Panel "and will continue to do so where we have knowledge of it." "Underpayment in any form is unacceptable and we urge any employee with a claim to contact FWO and/or the Fels Panel," head office said.

There are tens of thousands of workers and former workers who have been ripped off over the years. To date, 580 workers have contacted the Fels Panel or Maurice Blackburn, which is offering pro bono advice to victims of wage fraud. Some workers are afraid to come forward for fear of deportation. Professor Fels is confident that more will come forward "once payments arrive in the pockets a greater number will come forward." For the 7-Eleven whistleblower the problem of wage fraud is more complicated than the business model. "The corruption and desire to break the law is so ingrained in some of these franchisees that we can have the best business model in the world and they will still find a way to enrich themselves at the expense of the workers," he says. With 1.3 million workers in Australia on a visa, this is a problem.

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