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7-Eleven Underpayment Scams

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Published: Wed, 13 Sep 2017

Introduction

Human lives are directed by course of actions and decisions. Whether its personal life or professional conduct, humans are bound to follow proper code of ethics. In workplace, each organisation has guided rules and practices. Employers are bound to these rules and regulations in order for any organizations to work smoothly (Schermerhorn, 2010). Sometimes the morality of business decision is challenged due to individual preference or limitations. This scenario is called an ethical dilemma whereby individuals are forced to weigh the right and wrong of their actions (Westerholm, Nilstun, & Ovretveit, 2004). This essay examines impact of ethical practices and leadership in taking business decision. The organisation that is used for ethical study is 7-Eleven convenient stores in Australia. It discusses how organisations commit fraud and mock award system by underpaying staff.

The Ethical Problem

The shocking revelation by ABC’s Four Corners in August 2015 exposed exploitations at 7-Eleven stores gives an insight on how big corporations make profit without paying legit wages. A joint Fairfax Media-ABC investigation exposed that most of these exploited staff are international students who are ‘forced’ to work long hours even after their visa condition restricts them to work only 40 hours per fortnight (Ferguson, Danckert & Hatch, 2015). These students are easy targets for franchise operators as they are looking for extra money to manage their expenses. It shows that entire work structure at 7-Eleven is flawed and franchisees make profit by underpaying their staff is a common practice in most stores.

The head office claims that most of the franchise stores are paying legit wages and the underpayment were done by a marginal store partners. This blame game has raised a debate that who is sole responsible for this scam; the head office authority or the franchise owner. According to head office, the payrolls are monitored by franchisees and company merely provides administrative supervision. They claim that underpayment issue has nothing to do with the franchise profit sharing model and only a small number of franchisees are doing this wrong practice. But similar malpractice in multiple stores reveal that this is an organised fraud. The franchisees are trained to run their stores in a particular manner to make profits and more than dilemma it is a thoughtful unethical practice.

7-Eleven’s survival on employee exploitation

The Fair Work Ombudsman has conducted various raids at different stores and revealed that situation has worsen over the years. The entire work structure at 7-Eleven is flawed and franchisees make profit only by underpaying their staff who are international students and work limitless hours to make up for underpayment. The reason behind students breaching visa conditions is to manage their expenses because they are underpaid and only means to recover that loss is by working extra hours. The head office is not just turning a blind eye, it’s a fundamental part of their business. The reality is it’s built on something not much different from slavery,” 7-eleven insider (Ferguson, Danckert, & Hatch, 2015).

It is evident that these scam happens under the watch of head office management. They cannot blame the franchisees alone for this malpractice. Unscrupulous employers allow students to work more hours but threaten to report them to authorities for breaching their visa if they complain about working conditions. Employers’ sheets and rosters are doctored to maintain the scam (Ferguson, Danckert, & Toft, 2015). Companies can easily monitor the payrolls across the stores by surprise visits and take legal actions against frauds.

Following the investigations, 7-Eleven Australian office has marginalized the issue by suggesting that there are only small numbers of Franchisees who are culprit of underpaying and head office will ask them to pay penalties. The 7-Eleven chief executive Warren Wilmot said: “The key factor here is that the panel will receive, review, and process any claim of underpayment, and authorise repayment where this is appropriate,” The practices continuous in other forms underpayment, employees are still asked to back-pay part of their wages.

Theoretical Framework

The given ethical dilemma is a conflict between moral and business ethics. Loucks (1987) suggests that ethics is seen as something beyond obedience and adherence to the law. It implies an understanding of what is the good, or right, thing to do and of an internal system of beliefs and values that guide those actions. Solomon (2001 cited in Singer, 2013) argues that there is some confusion in defining exactly what constitutes ethical behaviour in an organisation. The given ethical condition poses an important questions about personal honesty and organised fraud. The virtue of honesty is crucial for personal and business ethics.

The choice of practising underpayments can be explained by two ethical theories; ‘Utilitarian perspective’ and ‘Subjectivism’. The Utilitarian theory holds that what an individual ought to do is to promote the maximum good for everyone i.e. the general good (Wong, 2006). The maximum good for everyone should be assessed by being neutral and thinking from multiple perspective. On the contrary, Rachel (2001 cited in Singer, 2013) states that ‘ethical subjectivism’ is a theory which says that in making moral judgements, people are doing nothing more than expressing their personal desires or feelings. The 7-Eleven scam is more about personal choices of the franchisee. They are legally entitled to pay fair wages but for their personal gains they malpractice. From franchisees’ perspective, it is assumed that the operational structure of the store asset management doesn’t make enough profits and that’s one of the reasons for underpayment.

Another important factor that governs this malpractice is known as ‘Agency Theory’. The theory explains that business owners and managers emphasize more on maximizing profit as they believe it as business rule (Eisenhardt, 1989). The ‘market trend’ tells the morality of the practices that what is right or beneficial for business. The moral choice is sometimes explained in terms of the influence of external factors, such as the environment or influence of others. All of these may bias judgment and action by shaping a decision maker’s perceptions (Morell, 2004). The franchisee believe that they are just following the ideal business model that will help them in managing operational funds by underpaying staff. In business ethical dilemma, there must be prominent line between personal choices and business needs. It is important to understand that personal choices are subjective and may affect other employees of the business. Therefore while taking business decision, a leader must abide by the corporate codes of conduct. As suggested by Thakor (2003), ‘the dividing line between law and ethics is a constantly moving one. What is legal but unethical today may well become illegal tomorrow.’ It is essential in this case to reflect on the stakeholders’ view of ethics. It criticises the agency argument that business operators must constitute their leadership that look after and protects the interest of employees.

The debate between moral values and business ethics in case of dilemma is mostly resolved by Utilitarian theory. However it is also necessary to understand that business situations can change how a professional takes decision based on personal choice and corporate needs. The franchisee may imply agency argument to protect their interest but from utilitarian perspective this directly affects the interest of the employees. The core issue is the leadership that has completely failed in case of 7-Eleven scam. Firstly, head office should have eradicated this malpractice at initial level. Secondly they need to develop a business structure that promotes mutual benefits and not just agency approach.

Critical Analysis

The underpayment by multinational companies is just the tip of the iceberg. We need to understand the factors that contribute to these foul practices.

  • Profit Sharing model that restricts franchisees to manage operational expenses.
  • International students who are eager to work extra hours to manage their funds.
  • The lack of regulators responsibilities in creating awareness and monitoring the operations.

The new Chief Executive of 7-Eleven Mr Michael Smith, who replaced Mr Withers in October 2015, said the company was making significant progress towards “satisfactory remediation and prevention” of wage abuse (Gartrell, 2016). The issue is now facing worse where many franchise stores are out for sales because franchisees believe that they do not have enough resources to pay running cost if they pay fair wages. This will also increase unemployment as a contributing factor.

According to Ferguson, “The regulator also needs to be better resourced and the government needs to give amnesty for a period to foreign workers to come forward and expose what is going on without the fear of being deported for breaching their visa conditions” (Barraclough, 2015). The remedial option is to change the profit sharing model or head office sharing some per cent of the running cost that enables franchisees to operate store efficiently without underpaying staff. The cause of the issues is the operational model that needs a revision under the governance of regulators who can strictly monitor the fair practices at these franchise stores. From ethical point, franchisees need to understand the core business needs and personal interest. One critical aspect of this malpractice at huge level is the influence of franchisee network. The new franchisees learn from the existing practices of the old franchisees and thus this malpractice becomes their routine.

Business model for Ethical practice

7-Eleven franchise model is unique in terms of how it shares the profit margin and it varies in different countries. In Australia, this model is unfair for franchise partner where head office takes 57 percent of the gross profit and franchisees are left with 43 percent to manage their expenses and overheads. The deficit is mostly paid by franchisees and they are left with only one options and that’s underpayment and back-pay wages. The revelation has put all franchise stores under surveillance resulting in many store out for sales in past 1 year. The issue is pertained due to 7-Eleven Australian model that doesn’t allow franchisees to make profit in that 43 percent profit share. The situation can only be resolved if head office shares 50-50 profit margin like other countries. It will allow franchisees to manage their overheads and pay fair wages to the staff.

Another aspect of this malpractice was the discrimination in hiring the staff. Franchisees mainly hire international students from India, Pakistan, China and other Asian countries because they are willing to work at less pay. It also raise questions about the head office responsibilities as they didn’t check the staff profiling or merit of recruitment. Most of these international students have trouble with English language and are less competent to work any other job. They are ideal fit for the 7-Eleven scam model because they are unaware about their work rights and hesitant to contact authorities for assistance. The ethical safeguarding of these employees is an integral part of store operations. Ideally, the head office should conduct induction training that includes work rights awareness.

Leadership and Decision Making

Such organised scams unveil how these big corporation make profits by exploiting their staff specifically vulnerable groups. The investigations also reveals how franchisee seek alternate payment methods to avoid taxes and super-annuations. The company claims that they do not have direct involvement in these practice but insiders reveal that it all happens under their watch. Companies need to monitor the working hours and payroll records to scrutinize frauds. Even though after such investigations company do take responsibilities and commit to help the victims. Such situations should be monitored from start and strict measures should be taken on head office part. The payback is not a solution to such huge scale scams that steals tax by doctoring the payrolls.

Therefore it is necessary that organisation have a defined ethical policy for business dilemma cases. It will help the decision makers to think rationally but will also remind them about the corporate good. Partiality or personal preference will bring subjectivism in the decision making process. Hechter & Kanazawa (1997) maintain that reservations about rational choice only arise where people misunderstand its application. The rational decision from an organisational perspective and individual perspective will differ depending upon the number of external factors influencing the decision. These ethical systems are normative in nature that means they imply the right or wrong factors but do not completely involve rational choice from multiple perspectives. They do tell us about what ought to be done and it helps in takin decision but it doesn’t provide clarity of argument, basis for decision and personal stand on the dilemma. The company leaders need to be more specific about their operational plans and communicate the same values to the franchisees.

It should be a wake-up call to make sure their house is in order. The world is changing and the community is becoming less tolerant of non-compliance to the law (Ferguson, 2015). The underpayment scam is not an issue that can be rectified by paybacks. The entire model of franchise stores needs to be reviewed considering Australian market stakeholders. This will allow fair share of profit to franchisees and will restrict them from ripping wages from the staff. The remedy needs to be planned in terms of reviewing head office responsibilities in cross checking payrolls and fair works. Strict actions should be taken against culprits to avoid further victimization of international students.

Recommendations

The investigations has only revealed one side of the scam. There is a need to review head office’s responsibilities in auditing these franchised stores. Temporary paybacks will not solve the evident fact that the entire 7-Eleven model is flawed for Australian market. Franchisees will keep finding such malpractice until they get fair share from the profit. This not only affect the employees but also damages the brand in the market. This is just the tip of the iceberg and there are many other companies who are in line for malpractice. This issue can only be settled with strong ethical framework that shares rights for franchisees and employees by maintaining transparency and accountability.

The world is changing and the community is becoming less tolerant of legislative non-compliance. There is strong need to modify the Franchising agreement for transparency and compliance. These are some of the majors that companies can implement;

  • Develop code of conduct to immediately terminate a franchise agreement if there is serious breach of workplace legislations by a franchisee.
  • Develop an auditing model that shares equal responsibilities between company and franchisees to monitor the operations
  • Take severe disciplinary actions against employees’ complaint and investigate based on evidence
  • Monitor recruitment process and diversity of employees to ensure minorities or vulnerable groups are not victimized
  • The company must hire independent investors and mystery shoppers to identify culprit franchisee for noncompliance.
  • Company must develop forum to share store practices and employees feedback that are anonymous and directly under the higher management
  • The franchisees can develop union and workout a model that supports equal benefit for multi-stakeholders

The companies need to ask whether underpayment is an act of being strategic in organizing businesses. This will decide the approach for business operations and compliance. Underpayment should never be considered as an options for managing expenses. Instead, business operators must generate revenue from other sources. It is not ethical operate a business that makes profit by sacrificing the employees’ interest. Even after accepting their mistake, company operator must redevelop their operational framework to ensure that such incidents does not happen in future. This can only be achieved by strong compliance and transparent auditing.

Conclusion

The exploitation still exist at other franchise chains like McDonalds, Pizza hut who operates on the somewhat similar franchise model like 7-Eleven. The scandal uncovered that such exploitations are common practice and mostly organized at management level. Underpayments not only affects the business but it also destroys the brand reputation in global market. It also brings bad name for the country considering that most of the staff are international students who work in stores to manage their expenses. Without remedial process this exploitation will become part of work policies and there will be no one answerable for wrong-doings. Although, this revelation has opened a Pandora box for other business operators but until there is a strong compliance legislation, such scams will continue.

The Fair work Ombudsman and government has tough task in eliminating such organised frauds and support workforce. Such scams forces business operators to assess their business ethics policies against the impact they create for multiple stakeholders. If business operators follow ethical leadership then they will have better control over compliance and mutual benefits for the business. The operational model can be modified to increase the stakeholders share and it will eventually help both parties to take ownership.

References    

Barraclough, C. (2015). Calls for action after the Inconvenient Truth about 7-Eleven is revealed – Procurement and Supply Australasia. Procurement and Supply Australasia. Retrieved 31 January 2017, from http://procurementandsupply.com/2015/09/calls-for-action-after-the-inconvenient-truth-about-7-eleven-is-revealed/

Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of management review, 14(1), 57-74.

Ferguson, A. (2015). 7-Eleven wage abuse scandal has lessons for all directors – ACAPMAg – The voice of downstream petroleum. ACAPMAg – The voice of downstream petroleum. Retrieved 30 January 2017, from http://acapmag.com.au/home/2015/10/7-eleven-wage-abuse-scandal-has-lessons-for-all-directors/

Ferguson, A., Danckert, S., & Hatch, P. (2015). 7-Eleven scandal: Company announces review of pay practices. The Sydney Morning Herald. Retrieved 31 January 2017, from http://www.smh.com.au/business/workplace-relations/7eleven-scandal-company-announces-review-of-pay-practices-20150831-gjbof4.html

Ferguson, A., Danckert, S., & Toft, K. (2015). 7-Eleven: A sweatshop on every corner. The Sydney Morning Herald. Retrieved 30 January 2017, from http://www.smh.com.au/business/workplace-relations/7eleven-a-sweatshop-on-every-corner-20150827-gj8vzn.html

Gartrell, A. (2016). Malcolm Turnbull’s financial stake in 7-Eleven under scrutiny. The Sydney Morning Herald. Retrieved 30 January 2017, from http://www.smh.com.au/federal-politics/political-news/malcolm-turnbulls-financial-stake-in-7eleven-under-scrutiny-20160204-gmlikw.html

Hechter, M., & Kanazawa, S. (1997). Sociological rational choice theory. Annual review of sociology, 23(1), 191-214.

Loucks, V.R. (1987) ‘A CEO looks at ethics’. Business Horizons, March-April, 2-5

Morrell, K. (2004). Decision making and business ethics: the implications of using image theory in preference to rational choice. Journal of Business Ethics, 50(3), 239-252.

Schermerhorn Jr, J. R. (2010). Management. John Wiley & Sons.

Singer, P. (Ed.). (2013). A companion to ethics. John Wiley & Sons.

Thakor, A. (2003) ‘Competence without credibility won’t win in the long run.’ in N. Tichy and A. McGill (Eds.) The Ethical Challenge (2005) San Francisco: John Wiley and Sons Inc. pp. 125-134.

Westerholm, P., Nilstun, T., & Ovretveit, J. (2004). Practical Ethics in Occupational Health. Abingdon: Radcliffe Publishing.

Wong, P. W. H. (2006). A study of business ethical practices in Australian organisations: a multiple case study. Theses, 47.


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