Amid the fracas of a wage fraud scandal tearing through Caltex, more than 200 franchisees and senior executives jetted into Tokyo in late March for a three-day conference at Tokyo’s swish Hilton Odaiba, overlooking Tokyo Bay.
Instead of the usual pomp and excitement of previous annual shindigs, the mood was sombre. Dozens of franchisees had been left off the invitation list after refusing to comply with a mandatory workplace compliance audit and those who had accepted came in the hope they would get some clarity on their future.
Do Caltex franchisees need wage fraud to survive?
Investigations are being carried out as to whether Caltex franchises are financially viable and if this results in Caltex franchisees underpaying staff.
As the franchisees piled into the auditorium to listen to Caltex boss Julian Segal and the general manager of retail operations Karen Bozic, silence enveloped the room when they were told the future of the retail operating model – including the franchisee model – was still under review.
“We understand this will cause some angst until you get clarification,” the room was told.
Yet, almost six months later, franchisees are still in the dark about their future. There is a sense of foreboding that the wage fraud scandal and two separate projects – project Oyster and Project Reef – will collide and franchisees will be the collateral damage.
Project Oyster is exploring Caltex’s role in the competitive and underdeveloped $20 billion convenience store sector as Caltex grapples with the longer term trend of declining income from fuel, and the more immediate hole it has to fill in the wake of the Woolworths decision to end a long-term strategic alliance with Caltex and sell its 500-plus Woolworths-owned fuel and convenience store sites to BP.
Project Reef is looking at the underlying business structure to see if the franchise model – or a corporate model – is the best way to support its convenience store strategy, which is seeking to tap into changing tastes including fresh food and other convenience options at stores.
At the same time Caltex, which has a market value of more than $8 billion, is conducting mandatory audits across its network to ensure workplace laws aren’t being breached.
Illustration: Simon Bosch
Through those audits, Caltex can seize hundreds of stores. Stores which franchisees have paid at least a combined $1 billion to buy Caltex can take and pay little or no compensation if workplace laws are violated at any level.
Between November and July, the franchise network shrunk from 650 to 500 stores while Caltex corporate sites expanded from 150 to 230. In the process Caltex converted about 80 franchised sites to corporate sites. Caltex says it already owns the stores and so there will be no impact on Caltex’s balance sheet.
For franchisees, termination means financial devastation.
On top of the audit process, franchisees whose five to 10-year franchise agreements are due to expire are being put on short-term contracts while the retail operating model review is in progress.
All this uncertainty is pushing the market value of Caltex sites down. Some franchisees say the market value has halved in the past year.
Quite how far the audit process has gone is revealed in a note Caltex wrote to franchisees saying: “So far decisions have been made or audits are in process for about half the franchise network.”
The note, obtained by Fairfax Media, said so far 30 stores “have been found to be complying with workplace obligations or are working with Caltex to remedy breaches”.
To date 116 stores have been issued termination notices or have prematurely ended their contracts after refusing to participate in a compulsory workplace audit.
In some cases franchisees are refusing to do the audits because they have been underpaying workers, in other cases they fear Caltex will use technicalities to terminate them.
Ash Vatsa bought two stores in April 2015 and has been juggling two jobs to pay the bills. He says he is on financial assistance from Caltex because his stores are losing money.
He owes the bank $350,000 and is worried that an audit will be used to remove him from the system.
Ash Vatsa stands by the Caltex petrol station in Merrylands where he is the franchisee. Photo: Jessica Hromas
Vatsa says he has always paid his workers correctly but he is worried he might not have all the paperwork the audits require. When he bought into the network in 2015 the records weren’t rigorous and he says it can be hard to keep track of students on visas, including when they are on holidays from university.
He is currently on an assistance program from Caltex because he is struggling to stay afloat.
“It is hard to get them and you go through so much and then six months later do it again,” he says.
“I should have applied last year but I was scared to apply.”
He says even with assistance he has to work a second job.
“My second job is in hospitality. I’m working at least 80 hours a week,” he says.
“It is very stressful not knowing what is happening, we owe $350,000. How do we pay that, where do we get the money to pay for that.”
In a statement Caltex insists it follows a “fair and rigorous process” before ending a franchise agreement.
Caltex CEO Julian Segal Photo: Pat Scala
Franchisee Sanjeev Kumar, who has a store in Woodridge West, Brisbane, is also refusing to take part in the Caltex-funded audit.
Kumar’s store was audited by the Fair Work Ombudsman in October and received a notice in April from the regulator saying there had been a minor compliance issue which required the repayment of $13 to one employee and $40 to another.
He wrote to the company discussing his financial and mental plight.
“My health problem has become more severe that I have developed back and frozen shoulder severe pain due to increased stress level.”
Kumar wrote that he “humbly” requested Caltex to refund his franchise fees of $160,000 on pro rata basis.
On July 31 Caltex wrote: “We are mindful of the health issues you have outlined below, however as I indicated in our meeting …Caltex is not willing to consider a buy-back or surrender of your franchise at this time. A surrender of your franchise agreement does not fit within Caltex’s current strategic plans.”
Caltex is accused of ripping off workers. Photo: Simon Bosch
So far 43 franchise sites have refused to take the audit. They hired law firm Lander & Rogers, which negotiated a settlement with Caltex, the terms of which are confidential.
According to Tean Kerr, it now represents a further 50 additional Caltex franchise sites in dispute with Caltex despite “many of them having already passed wage reviews by the Fair Work Ombudsman”.
“They are in dispute with Caltex because they believe that Caltex are intent on stealing their stores and the franchise fees they have paid.”
Kerr says the 7-Eleven scandal made Caltex management realise “Caltex is to blame for creating a franchise model that makes money for Caltex but exploits franchisees and pressures them into cutting corners to make ends meet”.
Caltex says in a statement that “initial investigations and audits were focused on stores where Caltex received allegations of wage underpayment or identified a high risk of non-compliance”.
It argues then that the high “run-rate” of breaches so far should not be seen as representative of the whole network.
It says its independent experts had found the model is sustainable, allowing franchisees to draw a wage, make a profit and pay employees lawful wage rates.
Caltex refuses to reveal the average profit, saying “the appropriate bottom-line profit for each store is highly variable depending on many business factors”.
But it is understood the average figure is about $60,000, which franchisees argue isn’t enough to pay bank loans and live.
Many say it is getting harder as they get squeezed to pay more to head office including royalties, rent, wages, Star Card fees, Star Boss, coffee machine leasing, drive-offs, where customers fill their tanks with petrol and drive off without paying, uniforms, accounting, electricity and bank card fees.
Former ACCC chairman Allan Fels, a former head of the 7-Eleven compensation scheme, said the terminations were unduly harsh. “These sorts of actions are draconian and exploitative of franchisees,” he said.
Professor Fels said with a “terribly” weak bargaining position, it demonstrates the need for more than just the newly minted Protecting Vulnerable Workers Act, which beefs up penalties for wage fraud and makes franchisors jointly responsible for workplace abuses if they have a “significant degree of influence or control” or influence over their franchisee’s affairs.
Professor Allan Fels has blasted the Caltex compensation scheme. Photo: Alex Ellinghausen
It is this control over franchisees that Professor Fels believes will result in a parliamentary inquiry into the $170 billion franchise sector.
Under Caltex’s franchise contract if a franchisee is terminated due to a breach of the franchise agreement the value of the business is returned to Caltex with the franchisee receiving only the value of any stock or other owned assets. Goodwill and other rights belong to Caltex.
“You acknowledge and agree that except expressly provided under the agreement or as may be required by law, at the end of the franchise you are not entitled to receive any payment or compensation from Caltex,” reads the relevant clause in a franchise agreement agreement.
Franchisee Danny Hanna believes he was terminated on a technicality after an 18-month audit by Caltex consultant PKF found he wasn’t paying his wife and parents wages.
“I was with Caltex for 10 years and they terminated me with a seven-year lease remaining,” he says.
“They said I hadn’t co-operated with the audit, yet I gave them access to my workers, to everything, they said I paid my family zero wages and had done potential damage to the Caltex brand.”
Hanna says his family didn’t take wages because he was struggling financially. He says many stores use family members to make ends meet and denies underpaying non-relatives. Caltex declined to comment, citing legal and privacy reasons.
Caltex has taken over the running of more than service stations. Photo: Sasha Woolley
After Caltex seized the store in late May, Hanna has been trying to find work so he can repay his business loan. He believes the termination process is a “heap of crap”.
Another franchisee who had three highly profitable sites worth an estimated $1 million each, believes Caltex used its might to take back highly sought after stores.
“They are acting like the police,” the franchisee says.
The stores were seized after an audit found a series of issues including wage fraud, not paying super, not of good character and various other contraventions.
The franchisee, who requested anonymity, says the family bought the stores from Caltex in 2015 for $200,000 each and built them up.
A final payment of $68,000 plus interest was made on one of the three stores to Caltex on July 3. On July 19 the franchisee was terminated and the stores seized.
“How unethical is that? To take the money then terminate us and get the value of the stores for nothing.” Caltex declined to comment, citing legal and privacy reasons.
The problem for employees is that if a franchisor terminates a franchisee and that franchisee is then left with no site and a big bank loan to repay, the chances of them repaying workers is slim.
So it isn’t just franchisees who feel aggrieved. Workers are also feeling done over.
Fairfax Media can reveal that four months after Caltex set up a $20 million compensation scheme for underpaid workers, only 101 have applied and nobody has been paid out, this is despite more than 116 stores either being kicked out or leaving after refusing to participate in an audit.
The scheme has raised the ire of the Fair Work Ombudsman Natalie James who said this week that Caltex had failed to engage with the regulator to develop the fund or report those individuals it had breached or terminated.
She warned that Caltex was likely to face “enforcement action” and that the investigation so far, which involved raiding 25 sites, had “similar themes emerging to 7-Eleven”.
Professor Fels describes the compensation fund as bogus and a “public relations stunt” requiring regulatory scrutiny.
Confidential letters obtained by Fairfax show that the compensation Caltex is offering workers is a fraction of their alleged underpayment. It also shows that the payouts are conditional on the workers keeping the information confidential and not making negative comments about Caltex. The conditions have raised concerns of the regulator which said in a statement it would take it up with Caltex.
The compensation scheme is a hoax, says former worker, Mustanser Bajwa, a bio-chemistry student at Sydney University.
He says the process from dobbing in his franchisee to making the claim made him feel used and exploited.
He informed on his employer in late 2016 after receiving a call from Caltex’s auditors to speak up. The franchisee was terminated in May, with Caltex seizing four stores worth an estimated $2.2 million.
Fair Work Ombudsman Natalie James Photo: James Brickwood
Earlier this month Bajwa finally received an offer from Caltex that was a fraction of the estimated underpayments he was owed between 2015 and 2016. He wasn’t allowed to go back any further, to 2012, because the Caltex fund only makes refunds from 2015.
“I have all the documents to pay me back to 2015 but they offer me so little,” he said.
He says the sad part for workers is that most of the serious underpayments date back further than 2015, before 7-Eleven was exposed for wage fraud.
“Caltex is not willing to investigate prior to 2015 because I believe before 2015 the underpayments across the Caltex sites were as bad as 7-Eleven stores,” he says.
So far 7-Eleven has paid out $150 million to thousands of workers.
But Caltex said it went back to 2015 because “allegations of wage underpayment in the franchise sector in Australia were first raised in 2015”.
7-Eleven has paid out $150 million in compensation Photo: Bloomberg
Therefore, Caltex considers January 2015 to be a “fair and reasonable date.”
To exploited workers like Bajwa, Caltex’s behaviour is worse than that of the franchisees.
“At least they aren’t hypocrites,” he said. “Caltex makes out they care about us but they are also underpaying us what we are owed. What’s the difference?”
Another worker Saad Rafique, who came to Australia in 2012 from Pakistan, worked an average of 65 hours a week at Caltex and was grossly underpaid.
Rafique is currently working at a Caltex store but agreed to speak up because he feels so strongly about what is going on. He says he was underpaid for years and has all the evidence.
He lodged a claim with Caltex but was shocked by the lowball offer, which he believes it 30 per cent of what he is owed.
“The offer is so little yet they won’t tell me how they calculated the amount,” he says.
Compensation offers are said to be too low.
Rafique says he was puzzled by what Caltex was doing with the money.
“They are taking away the livelihood of franchisees, paying them nothing when they terminate them and giving workers nothing.”
He believes Caltex is no better than the franchisees that underpay workers.
“Why won’t they do the right thing, they want us to say nothing bad about them, they want to silence us and we have no idea how they are making the calculations.”
Another worker, a student on a visa, said most workers decided not to apply because the bar was too high to prove underpayments and unlike 7-Eleven Caltex would only pay up to 20 hours for students.
“Everyone knows that students have to work longer hours to make up for the low wages they get paid,” he says.
“Sometimes students don’t have any choice but to breach their hours, but Caltex doesn’t care. This makes many think they can’t be trusted.”
Caltex says in a statement the compensation fund relies on the information provided by franchisee employees to calculate wage underpayment.
It says the payment is an ex-gratia payment that “represents a contribution towards any claim they may have in respect of their employment with the franchisee”.
It tried to distance itself from the problem, saying Caltex was not the employer, had no part in wage underpayment and had no liability to pay franchisee employee entitlements.
“Caltex has established the fund to do the right thing by franchisee employees and provide some assistance to those who have been underpaid.”
As the Fair Work Ombudsman continues to examine the findings of the stores it raided last year, franchisees and former franchisees are coming forward alleging the business model is being increasingly stacked against them as Caltex grabs more and more in fees and rentals.
Certainly there is evidence from the emails obtained by Fairfax and interviews with former franchisees that Caltex was made aware of wage fraud issues over a number of years.
One email seen by Fairfax Media by a former site owner to a senior manager complained he had flagged similar issues to those at 7-Eleven to another senior manager in June 2011.
Another former Caltex franchisee, Kevin Crossey, who operated a number of sites between 1998 and 2014, has previously told Fairfax that he repeatedly told head office there was a problem with wage fraud.
“I was on the NSW state franchise council and national franchise council representing franchises over a number of years,” he said in an interview last year.
One email written by a worker to a Caltex manager in 2014 flagged issues including staff sacked without payment. “Many time local people come to apply for the job but [the franchisee] keep the money… I have been treated okay because I always spend two hours etc without pay… they have kept copies of our passports.”
Caltex says it has responded to every allegation made about wage underpayment, including allegations made in 2014 about wage underpayment at businesses to which Caltex was a fuel supplier only, not the employer and not the operator.
But Caltex has a problem. It has created a toxic relationship with franchisees and workers alike.
“They are trying to hide under the banner of doing the right thing but their actions prove they are not doing the right the thing,” Saad Rafique says.
“The scheme should be open for everyone, for all years and for all entitlements.”
But it’s not.