Franchisee wage fraud: 7-Eleven vindicated in Supreme Court case

In a significant judgment handed down by the Supreme Court of New South Wales, 7-Eleven’s decision to terminate its franchise agreement with a franchisee for engaging in wage fraud has been vindicated by the Court.

Norton Rose Fulbright acted for 7-Eleven in this high profile matter. We offer the following summary of the case of Chahal Group Pty Ltd and Anor v 7-Eleven Stores Pty Ltd [2017] NSWSC 532 and some insights into its significance.

Facts

The case concerned a claim for wrongful termination of a franchise agreement brought by the franchisee, Chahal Group Pty Ltd (Chahal), against the franchisor, 7-Eleven.  7-Eleven had terminated its franchise agreement with Chahal following investigations which revealed that Chahal had been requesting 'cash-back' payments from two of Chahal’s employees. 

These employees had been paid their award rate entitlements directly by 7-Eleven. However, on demand from Chahal, the employees were subsequently required to pay back to Chahal a portion of their salary in cash (cash-backs). This allowed the franchisee to conceal underpayment of the employees and circumvent the payroll system administered by 7-Eleven, in order to obtain a financial benefit from the exploitation of its employees.

Upon becoming aware of the cash-backs, 7-Eleven terminated its franchise agreement with Chahal and took possession of the franchised business on the basis that:

1. Chahal had acted fraudulently in implementing the cash-backs arrangement; and
2. the continued occupation of the franchised business by Chahal was likely to cause substantial damage to 7-Eleven’s reputation.

Chahal challenged the legality of the termination by commencing equity proceedings in the Supreme Court of NSW against 7-Eleven. Chahal’s claim revolved around a denial that any arrangement involving cash-backs  had been implemented.

The matter proceeded to trial essentially on the basis of whether the Court would prefer the evidence of the two employees over the evidence of Mr Chaudhry, who was the principal of Chahal.

Decision

The Court found in favour of 7-Eleven, finding that the termination of the franchise agreement was valid as the cash-backs did occur. 

The credibility of the witnesses was key as there was a direct conflict between the evidence of Mr Chaudhry and the two employees.

The detailed quality of the affidavit evidence given by the employees and their performance in the witness box under cross-examination were important factors in the Court’s decision. The Court also considered the respective motives of each witness in giving their evidence and its bearing on the inherent probability or improbability of the cash-backs having occurred.

Lessons

In wage fraud cases the important issue is to obtain compelling evidence from employees and have them perform strongly under cross-examination. It is crucial that a careful and detailed examination of employee evidence is undertaken in advance of termination taking place. Procuring ongoing cooperation from the employee witnesses in the course of the litigation and up to trial is also fundamental.

Adverse media and political commentary in relation to wage fraud has been misdirected towards the 7-Eleven brand over the past 18 months when, in fact, it was franchisee underpayment of employees which lay at the heart of the so-called scandal. Despite very significant efforts being taken by 7-Eleven to stamp out such misconduct on the part of its franchisees, in some instances the conduct continued.

This case demonstrates the resolve with which 7-Eleven has been prepared to hold franchisees to account for their unlawful behaviour and the extent to which affected employees have been willing to cooperate with 7-Eleven to do so.

If you wish to discuss strategies for dealing with wage fraud in your network, please feel free to contact Joanne Moss or Nigel Jones.