Chatime’s major shareholder is the listed Taiwan-based La Kaffa International, which holds 55 per cent of the Australian franchisor. The international powerhouse has more than 700 outlets in 38 countries and its senior executives had jetted into Sydney earlier that day along with a handful of international media.

Its suggestive ad campaigns such as "Blow me"and more lately, "My first (cha) time … the balls felt weird in my mouth" had resonated with teenagers who routinely queue for a taste.

It was November last year and the milestone capped swift growth for Chatime since its first Australian store opened in 2009, selling Taiwanese flavoured tea with tapioca balls or "pearls".

They were there to celebrate the chain’s 100th store opening.

Executives and franchisees from bubble tea phenomenon Chatime waded through the deluge in formal gowns and tuxedos making their way to the prestigious Point Piper Royal Motor Yacht Club.

Torrential rain and thunder smashed Sydney, delaying planes, flooding roads and causing traffic mayhem, but nothing was going to dampen the mood of this party.

It can also reveal that Zhao and Qian were linked to underpayment issues at another bakery chain in 2018.

An investigation by The Age and The Sydney Morning Herald can reveal Chatime was caught up in rampant underpayment issues, not just among its franchisees, but in the corporate stores owned by head office, and that the Australian company’s founders have been at each other’s throats in court.

Behind Chatime's spin and its lavish alcohol-infused party, the Australian subsidiary, 45 per cent owned by Australian directors Charlley Zhao and Iris Qian, was harbouring some dark secrets.

The message here was that Chatime was not like the rest of the $170 billion franchise sector, which had been battling reputational issues after a series of high profile scandals including 7-Eleven , Caltex , Domino’s , Pizza Hut and Retail Food Group . Those scandals sparked a parliamentary inquiry which exposed punishing business models, financial ruin, suicides and rampant wage fraud and called out the need for reform.

Earlier that day, Smart Company had published an article attributing Chatime’s success in Australia to transparency and a strong respectful relationship with its franchisees that included "significant support"and trust. A mandatory bookkeeping model provided "visibility"for payroll compliance.

The plan was to get some positive publicity to spruik a planned listing of the Australian subsidiary, Infinite Plus, on the ASX in 2019. That move would raise millions of dollars to fund its expansion plans.

It also reveals that the watchdog, the ombudsman has done little to protect hundreds of underpaid workers in corporate and franchise stores over the past decade.

A procession of insiders, franchisees, workers and a series of critical documents including confidential letters from the Fair Work Ombudsman (FWO) and internal documents, paint a picture of a company with poor corporate governance.

Most of the underpaid workers are foreign students on visas from China and Taiwan too afraid to complain to authorities for fear of deportation. Many breached working restrictions attached to their visas to survive.

At the heart of many of Chatime's problems is a cover-up of underpayment issues in its 1150-strong workforce that has been going on for years and is estimated to run to millions of dollars.

This latest scandal to hit the franchising sector comes in the wake of a damning parliamentary report into the industry . That report called for greater enforcement powers and penalties and a suite of changes to the franchising code. Labor has committed to setting up a taskforce to examine the recommendations while the government is yet to release a response.

It said moving to this award would not exempt Infinite Plus from an underpayment liability. It is estimated that liability would run up to $6 million if the matter materialised.

Directors of Chatime's corporate entity - Infinite Plus - held a board meeting that month to discuss various matters including moving their employees onto the fast food award.

In May 2017 the ombudsman launched an investigation into Chatime’s corporate stores. It covered a short period of a few months, but it spooked Chatime, which had been reading the news about a scandal that had erupted weeks earlier at one of the country’s biggest franchise chains, Domino’s Pizza.

He said he was still waiting for full compensation, along with many others.

"We lived in a share house and my parents sent money to pay for study and rent," he said.

One worker who left last year said he and his wife were underpaid tens of thousands of dollars since they started working for corporate stores shortly after the chain opened in 2009.

The ombudsman confirmed to The Age and The Sydney Morning Herald that an investigation into Bakery Venture, trading as Dough Collective, had identified 37 staff paid as little as $12 an hour, totalling $350,000 in underpayment across four stores in Sydney.

Qian and Zhao were also juggling another investigation by the ombudsman into a string of bakeries, Bakery Venture, where they were directors and key shareholders.

Disclosure documents in 2017 list a lawsuit in the NSW Supreme Court between the two directors after Qian filed an expulsion notice against Zhao alleging he had breached a shareholder agreement that would allow her to buy him out. The case went to arbitration and a confidential settlement was reached in mid-2017.

The atmosphere at head office at the time was tense, according to insiders, as the relationship between Zhao and Qian had become toxic.

But the company decided at that meeting that no provision was required in its accounts at that stage.

It said the investigation was finalised through a formal caution in August 2018. It said the company had gone into liquidation during the course of the investigation, limiting possible enforcement options beyond the backpay that was secured for the workers.

The investigation was never reported and therefore escaped the public glare - until now.

Soon after the ombudsman finished its investigation into Bakery Venture it also wrapped up an audit it had been conducting into Chatime.

The audit covered a period from August to December 2016. In a letter to head office in 2018 the ombudsman confirmed it had identified more than 150 underpaid workers in Chatime’s corporate stores, which are owned by head office.

The watchdog gave Chatime until September 18, 2018 to rectify the underpayments, which it estimated at $113,494 in NSW and $62,975 in Victoria.

The ombudsman decided not to make this investigation public or issue any penalties.

The letter said evidence gathered during the investigation included minutes of a Chatime management meeting in October 2016, email exchanges, compulsory evidence from staff and recorded interviews with Zhao and Qian and other senior executives.

It said the evidence "indicates that Mr Charlley Zhao, managing director of the company, was involved in the contraventions of the company during the assessment period". It said he was "knowingly concerned in the contraventions pursuant to section 550(2) (c) of the FW Act".

It went on to say that "Mr Zhao had knowledge that an award applied to the company; knowledge that the company's system of payments would result in employees being underpaid; and knowledge that contraventions of the award were occurring within the Assessment Period during the assessment period."

The letter didn’t make any allegations against Qian or suggest she was involved in any wrongdoing.

If the ombudsman's audit period had gone back to 2009 the amount owed to workers in the corporate stores is estimated at millions of dollars. If it included the franchise network, which has many more stores, and the audit period extended to today, the figure would conservatively blow out to well over $10 million.

The ombudsman declined to comment on its investigation into Chatime and Infinite Plus, why it chose a short audit period or the allegations raised in the letter it sent, citing an ongoing investigation.

The Age and The Sydney Morning Herald sent a series of questions to Chatime, Zhao and Qian, its overseas parent La Kaffa and two directors. Chatime, Zhao and LaKaffa declined to respond to the questions or comment on the ombudsman’s investigations, including the letter or the ongoing investigation. Qian also declined to comment.

We do not propose to comment or otherwise correct any of the assumptions you have made (some of which are erroneous) Chatime statement

In a statement Chatime said: "We do not propose to comment or otherwise correct any of the assumptions you have made (some of which are erroneous), as it would be inappropriate to comment on matters that may be under investigation by a regulator, potentially compromising not only confidentiality but the integrity of an investigation."

It said it had made "significant improvement in people capabilities (internal and external), business/payroll systems, compliance, training and education to ensure full compliance at all times. From mandatory book keeping, outsourced payroll and many other aspects of the operational side of the business".

It said in the past some of its business systems and payroll capabilities had not kept pace with the rapid growth of the business.

Loading

It expressed a commitment to paying its people correctly and pledged that, if underpayments were identified, it would rectify the issue.

"[Chatime] unreservedly apologises if or when we get it wrong. At Chatime, we see our employees as family and recognise they are the key to our success. We strive to be an employer of choice and uphold our values of being a fair, open and transparent business playing by the rules and being a good corporate citizen," the statement said.

The company said it was "unfortunate" that it was legally constrained on elaborating on the allegations and it was investigating how documents had been "unlawfully leaked and by whom".

The ombudsman said its investigation into Chatime's head office was part of a wider investigation into other bubble tea operator GongCha, which has more than 55 stores in Australia, and smaller operator Sharetea, as well as other overseas franchise operators.

Fair Work Ombudsman Sandra Parker. Credit:Nick Moir

"These businesses often implement operating models and workplace practices associated with their countries of origin," Fair Work Ombudsman Sandra Parker said.

"In combination with employing migrant workers, who may be unaware of their rights, there is significant potential for non-compliance."

Documents show that in response to the ombudsman’s 2018 letter, Chatime's head office wrote an internal note to staff on October 18, describing the underpayment as a "system error" that had been detected during a routine wage audit that had resulted in "pay discrepancies".

In the letter, Chatime apologised for the failure of the systems and said all affected staff in the corporate stores would receive a back payment. It didn’t say how many staff had been affected, over what period or the amount involved.

Chatime lowballs a worker

But it seems Chatime sometimes plays hardball on complaints. In one case a supervisor at a corporate store in Sydney wrote to Chatime’s head office in October, 2017 concerned that she had been "seriously"underpaid between 2013 and 2015.

She said the rate she had been paid was at least $7.53 an hour below the legal rate, excluding penalties, which would have made it even more. She said she wanted the company to repay her the money owed or she would lodge a complaint with ombudsman.

She hadn’t calculated the figure as she didn’t have the relevant payroll records but hoped the company would do the right thing.

Chatime referred her complaint to law firm Australian Business Lawyers and Advisers, a subsidiary of the state's peak business organisation, NSW Business Chamber.

Loading

It advised Chatime in an email on November 17, 2017 that "if all the data was available, the likely underpayment would be in excess of $32,000 (ex super)".

One lawyer is quoted in an email suggesting paying the employee $20,000.

The law firm suggested Chatime go back to the worker with an "approximate"figure and to negotiate, subject to a deed of release "so she can’t talk about this with other current ex-employees."

The legal advice concluded: "It is of course open to Chatime to commence negotiations at a slightly lower amount than $32,000 – particularly if [the employee] has indicated that she is keen to resolve the matter expeditiously and there is some risk that she too, may have been a party in breaching the conditions of her student visa (ie she would be just as culpable as Chatime in relation to any breach of the 20 hour work restrictions attached to her visa). We trust this assists."

Pay records indicate the worker was paid $20,154 at the time, not the $32,000 she was owed, in return for signing a gag order.

The law firm involved said it could not discuss an individual client and that the leaked documents were likely covered by confidentiality and legal privilege.

"What I am authorised to say is that the information you have is incomplete and incorrect," it said.

Chatime refused to answer questions on the incident or why it had paid her less than the full amount owing.

Loading

Last month the ombudsman issued a press release that it had taken legal action in the Federal Circuit Court against a former Chatime franchisee in Sydney, alleging it underpaid 17 staff, mostly international students on visas, $46,000 between January and November 2017.

In the press release, the ombudsman named and shamed the directors of the franchise and said it was seeking penalties for the breaches.

It prompted a Chatime insider to criticise Fair Work as a timid regulator. "It’s pretty standard picking on the little guys, not the big guys," he said.

Professor Allan Fels, chairman of the Migrant Workers Taskforce, recently published a report into underpayment issues and called on the Fair Work Ombudsman to get tougher and have a stronger enforcement response to the entrenched underpayment of workers across the country.

For now the long suffering workers are still waiting for the regulator to do its job and the company to repay what’s owed. It’s been a long time coming.