Wage fraud will continue until politicians stop it. They can – but will they? | Josh Bornstein

Following yet another wage fraud scandal – this time at restaurant chain, Dainty Sichuan – a recent newspaper editorial contended that, “Further layers of workplace regulation are not the solution to wage fraud.” Instead, it argued in favour of stronger enforcement of existing laws. The editorial could not be more wrong.

A systematic and enduring pattern of gross exploitation of workers is compelling evidence that the existing regulatory framework is broken. 7-Eleven, Domino’s, Pizza Hut, Myer, Coles, Caltex, Australia Post, Woolworths. The list is extensive and grows each week.

The unprecedented number and scale of wage fraud cases is a direct result of regulatory failure. First, companies have increasingly sourced labour through intermediaries, thereby avoiding existing labour laws. Second, the penalties for wage fraud are far too low to deter wrongdoers. Third, the companies at the top of the often intricate structures of exploitation almost always escape liability for their flawed business models.

The workplace watchdog, the Fair Work Ombudsman, has just announced that it has now achieved a record-breaking $1m in court orders for compensation and penalties against 7-Eleven franchisees. But because of inadequate workplace laws, there have been no such orders against 7-Eleven for its part in creating a business model that led its franchisees to underpay employees in order to survive.

The answer is clear – stronger and more sophisticated regulation. A comprehensive rewrite of existing workplace laws is required.

That the era of deregulation is exhausted should no longer be an issue. Free market fundamentalists rebounded from the global financial crisis with a remarkable ease, treating it like a mere flesh wound. But almost a decade later, the game is up. The twin business strategies of suppressing wages and side-stepping taxation obligations to benefit those at the top of the wealth distribution curve is no longer acceptable. The economic and political damage is too great. The other 90% are joining the dots. They are many and they are angry.

The time is ripe for progressive politicians to redefine the role of government as dynamic, agile and at times, strongly interventionist. The art of regulation needs to be rediscovered. Like using muscles that have been inactive for a long time, the transition won’t be easy. The same private sector interests that have reaped the bounty of economic rewards for many years remain cashed up and overwhelmingly powerful.

Politicians will struggle to tame the influence of big business seeking to subjugate the public interest. To succeed will involve rebooting a genuinely representative democracy, including by confronting the pernicious influence of political lobbying and a myriad of other rent-seeking techniques.

There is no better illustration of the challenge than the wage fraud scandal at 7-Eleven.

Like employment agreements, contracts between franchisors and their individual franchisees are often not negotiable. They are prepared by the franchisor and are usually signed unchanged. While there is some legislation prohibiting certain clauses in franchise agreements, typically their extensive terms heavily favour head office.

When he was prime minister, Tony Abbott promised that “unfair contracts” could be rewritten to balance the ledger and give franchisees a fighting chance. As small business minister, Bruce Billson was charged with making it happen.

Then the lobbyists at the powerful Franchise Council of Australia went to work. Billson was persuaded to drastically water down the new laws. When they were introduced in 2014, 7-Eleven and other big franchisors had nothing to fear. Their take-it-or-leave-it contracts were left untouched.

In fact, the franchise contracts at 7-Eleven proved to be a ticking bomb. Less than one year later, in September 2015, the bomb went off when Four Corners and Fairfax revealed extensive wage fraud occurring in 7-Eleven franchises across the country. On reviewing the franchise contracts, Prof Allan Fels observed, “My impression – my strong impression – is that the only way a franchisee can make a go of it in most cases is by underpaying workers, by illegal behaviour.”

Having been dumped from cabinet by Malcolm Turnbull, Bruce Billson left parliament at the 2016 election. In a depressingly familiar trajectory, he parlayed his political career into a new role – as executive chairman of the Franchise Council. As the 7-Eleven compensation bill for wage fraud soared past $100m, Billson welcomed his new role, stating: “I’m a great believer in the franchising model ... a wonderful way for enterprising men and women to get into their own business but not be on their own.”

Confronting a catalogue of wage fraud scandals and growing political pressure from the opposition, employment minister Michaelia Cash finally persuaded her cabinet colleagues of the need to act. In March this year, Cash introduced the protecting vulnerable workers bill. Under the bill, franchisors would be held liable for workplace violations by the franchisees where they exercise significant influence over the franchisee; if they knew or should have known of the underpayments; and if they failed to take reasonable steps to prevent the violations.

The proposed new laws, primarily targeted at franchises, are still not strong enough to change the situation for many underpaid workers.

Writing in the Australian Financial Review, journalist Adele Ferguson claimed that Bruce Billson “has conducted personal lobbying … of various current and former politicians no doubt helped by relationships and friendships built up during his years in parliament to ‘ensure that the franchise sector’s interests are strongly and clearly communicated to the government and responsible Minister’.”

Billson’s lobbying efforts have included emails to Joe Hockey in Washington to warn him that the Trump administration opposes the new laws, including one which read:

The lobbying by the Franchise Council continues, and as a result, the passage of the bill through parliament has been delayed. Whether it passes, and in what form, remains to be seen. A critical question posed by Prof Ross Garnaut in recent years – “whether changes in the way private interests seek to influence policy has removed the possibility of governing in the public interest” – remains unanswered.

All the while, the scourge of wage fraud continues to damage the lives of employees, their families and also the broader economy. For the first time in living memory, Australians are living through both a wage fraud crisis and low wage crisis. In the absence of politicians committed to robust regulation and able to withstand the immense pressure from the private sector, the situation will not improve.