The problems for workers during Australia's 'pizza wars' have been revealed

Photo: Denis Doyle/Getty Image

Fair Work Ombudsman Natalie James has revealed that restaurants and takeaway food outlets are vastly over-represented in pay disputes her organisation deals with, with more than one in every 10 complaints coming from the sector.

In a recent speech to the Industrial Relations Society of NSW, James said there were “appallingly low rates of compliance with work laws in fast food generally” and while café, restaurant and takeaway food workers represented just 5% of the workforce, they were responsible for 11% of FWO disputes.

More than half the businesses the FWO checked in recent years were not compliant with their pay and record keeping obligations, a problem emphasised in revelations earlier this year that Melbourne’s Made Establishment group, led by Masterchef star George Calombaris, was forced to back staff $2.6 million in backpay after the FWO alerted the company to problems back in 2015.

Made is just one of a number of high profile eateries involved in underpayment issues in recent months, including baker Adriano Zumbo and Malaysian restaurant chain Mamak.

James said that when the FWO ran a national hospitality industry campaign between 2012 and 2015, they found 52% of the hospitality businesses audited contravened the law.

“The results for take away businesses were the most concerning, with only 33% of businesses fully compliant with all pay and record keeping obligations,” she said.

And the extent of the problem is especially apparent in what she dubbed the “pizza wars” between two dominant players, Pizza Hut and Domino’s, which have both fallen foul of the pay umpire in recent years.

“There are some big cheeses in the pizza business, established franchise systems with well-known brands, international business interests and reputations; our view is they have some work to do. The allegations of non-compliance with workplace laws reflects in many ways an increasingly fierce competition in the business of getting food to households,” the Ombudsman said in her speech.

Today the FWO said it was taking a Gold Coast Pizza Hut franchisee to court for alleged sham contracting activity and underpaying an Indian delivery driver more than $6000.

Dong Zhao, who runs a Pizza Hut franchise outlet at Upper Coomera, is accused of providing false records to the Fair Work Ombudsma, as well as failing to produce employment records and contravening pay slip and record-keeping laws.

Zhao’s outlet came under scrutiny when the FWO audited more than 30 Pizza Hut outlets and identified widespread non-compliance in the franchise network.

FWO inspectors allege Zhao paid a delivery driver $16 an hour flat rate in a “sham contracting” deal when he should have been an employee on more than $20 an hour.

The driver has now been back-paid in full. The matter goes to the Federal Circuit Court in Brisbane on August 7.

One with the lot

Chef George Calombaris. Source: Instagram/Gazirestaurant

But the legal action is part of a wider problem with the FWO finding non-compliance in at least 24 stores, with seven franchisees misclassifying delivery drivers as contractors.

Three Pizza Hut franchisees subsequently entered into Enforceable Undertakings with the FWO and 11 were issued with Compliance Notices.

James said the FWO is still finalising investigations into a number of other franchisees and further enforcement action is possible.

In September last year, Australian private equity business Allegro took control of the Australian licence for Pizza Hut, installing three former McDonald’s executives, Peter Rodwell, Lisa Ransom and Chris Leslie, as the pizza chain’s senior management.

The company subsequently bought the failed Eagle Boys chain from its administrators last November and has been converting them to Pizza Hut stores.

In January, when allegations about the widespread problems in the group emerged, Pizza Hut Australia CEO Lisa Ransom told Business Insider that the company has been working proactively with all franchisees and the Fair Work Ombudsman.

“We have also worked diligently to reinforce to franchisees their obligations as employers, ensure all the appropriate tools are in place for them to calculate rates of pay, and facilitate access to the Fair Work Ombudsman online training tools,” she said.

But in her speech last month, Natalie James said the business had failed to act on the problems her organisation identified, despite having the details for five months.

“We are also in discussions with Pizza Hut about what it might do to address what appears to be widespread non-compliance by its franchisees. The evidence has been in front of Pizza Hut since January this year,” she said. “Unfortunately the franchise is yet to make any commitment to address what appears to be a systemic problem in its network.”

In response, Pizza Hut Australia CEO Lisa Ransom Lisa Ransom said the company was “committed to ensuring we, and our franchisees, are paying team members correctly”.

“Now that Pizza Hut is aware of this situation we are working with this franchisee to rectify any concerns raised in the audit. We also look forward to an open and proactive channel of communication with the Fair Work Ombudsman,” she said.

James said that between June 2010 and January 2016, the FWO completed 144 requests for assistance involving Pizza Hut franchisees.

“I am told that pizza is undoubtedly Australia’s favourite fast food. In the year to March 2016, almost five million Australians ordered pizza at least once a month,” she said. “If that sounds like a lot of meat lovers that’s because it is; the Australian pizza world has annual revenue of $3.7 billion and more than 4000 businesses are vying for a slice.”

“Pizza businesses employ around 14,000 of the 580,000 café, restaurant and takeaway workers in Australia. These workers tend to be younger, less educated and lower paid than other industries.”

A brief history of underpay

A 2010 audit found that around 7% of delivery drivers were underpaid. Picture: Getty Images

James said that the FWO’s interest in Domino’s goes back to 2010 in response to complaints from workers in both franchised and corporate stores.

“Our inquiries and investigations identified that Domino’s was not applying the correct industrial instrument to its delivery drivers in some cases,” she said.

An audit found that around 7% of delivery drivers were underpaid and subsequently received $588,000 in back-pay.

The FWO and Domino’s then entered into a “Compliance Partnership”.

Here is James explaining how the arrangement works in her speech:

The partnerships extend beyond the legal obligations with which a business must comply, and provide an accountable and transparent way for a business to take moral and ethical responsibility for its supply chain or network. This is something we have been encouraging for some time, often seeing the encouragement bear fruit after allegations of worker exploitation result in a brand experiencing negative publicity.

She said that after the first partnership, the FWO believed Domino’s understood its importance and entered a second one in 2014, which has since lapsed.

James outlined that towards the end of 2015 the FWO “became aware of the potential for systemic issues in the Domino’s network due to a request for assistance concerning a particular franchisee in South Australia. We discussed our concerns with Domino’s at the time and were confident they understood the risks, as head office took agreed action to address the non-compliance in question for all affected employees.”

But last year, the ombudsman’s “concern grew that all was not well”.

In the second half of 2016, James said they “began receiving intelligence of a confidential nature alleging that Domino’s franchisees were exploiting vulnerable workers”.

She outlined what happened next:

The nature of what we were hearing was more serious than what had arisen back between 2010 and 2015, recalling we had been in regular and frequent dialogue during this period with Domino’s head office.

The new allegations of exploitation of workers were being amplified via the media. Domino’s assured us that they were both mindful of, and were addressing, these concerns. Indeed, we were aware they had exited at least two rogue franchisees in 2016, and then earlier this year we learned that their audits had recovered $4.5 million for franchisee workers in unpaid wages and superannuation. They also told us they would continue to audit stores.

Be that as it may, as the regulator, we need to form our own views about compliance in their network. That is why we are conducting our own independent compliance activity that began in late 2016, which will inform an assessment of any breaches of the law by Domino’s or its franchisees and appropriate consequences.

In response, a Domino’s spokesperson pointed Business Insider to the company’s May 31 ASX announcement, which says an independent audit by Deloitte on compliance “is well advanced, but yet to deliver its findings”

“Because of the number of stores being audited, the process is taking longer than anticipated,” it says.

Door-to-door problems

Picture: Getty Images

In her speech, James also flagged that there are potential problems with technology bringing to the sector as third-party delivery services expanded the takeaway options for restaurants.

The competitive advantage pizza once enjoyed “is disintegrating” as a result, James said.

“Whether the workers picking up delivery jobs through their mobile phone should be entitled to minimum wages under the Fair Work Act is an obvious question to ask and indeed many have,” she said.

“We have already cast the contractor-vs-employee lens over the delivery arrangements at Domino’s and Pizza Hut and found them wanting in some cases. We can’t leave question marks hanging over other services that enter into the same market.”

And while the FWO is looking at the sector, the issue of exploitation was not coming predominantly from those involved.

“Despite the public debate, sweeping assertions and excitement about overseas legal developments, my agency has not been inundated by complaints from workers in these sectors. Much of the noise comes from the established competitors,” James said.

“But this is not to say we have not had any complaints, or that there isn’t public interest in examining the question.”

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