Deacons: Australian franchises’ high standards

According to Deacons , speaking at a Franchise Council of Australia Nation Convention several years ago, Australian chairman, Peter Ritchie, noted that McDonald’s Australian operations were the jewel in McDonald’s international crown, exceeding best practice across the entire range of benchmarking criteria – operational, financial and managerial. This, of course, reflects highly on McDonald’s Australian management team which is in turn reflected in the regular appointment of Australian executives to the international management team.

Any judgment that starts with the sentence, “The assistant manager of a McDonald’s franchise restaurant introduced a 15 year old employee to drugs and sex,” is bound to attract attention. The judgment, of the Washington US Court of Appeals, records a series of extremely unfortunate events.

The franchisee hired an employee despite his disclosure that he had “legal problems” and had “committed a bank robbery”. In fact his criminal record was extensive. He had held up employees at the airport shuttle where he worked on two occasions, robbed a grocery store and had been convicted of three counts of robbery, possession of marijuana and drug paraphernalia and theft. After being employed as an hourly crew member he served eight months in jail for the robbery yet on his release was rehired and, within a month, was promoted to assistant manager for night shift operations.

The judgment records that there was at the time a thriving drug scene among employees at that McDonald’s outlet. Assistant managers supplied marijuana to employees many of whom, including managers, smoked pot daily at the restaurant. It was into this sorry scene that the plaintiff, then 15, had the misfortune to stumble. Within weeks of starting work she was part of the drug scene and within a few months she became involved with the assistant manager with the unconventional CV who provided her with free food, alcohol and drugs and who kissed her openly in the workplace. It is not necessary to go into the further details relating to the commencement of her sexual relationship with the assistant manager or her running away from home or her father’s response which involved a fire poker. Fortunately she was later reunited with her family but legal and public perception repercussions lingered.

It is perhaps naively complacent to suggest that such facts are never likely to be before an Australian court – at least in relation to a franchise system of the stature of McDonald’s. But, I’ll suggest it anyway.

The attitude of McDonald’s in Australia and the extent to which the system’s reputation is jealously protected is illustrated by a 1994 case: Carr v McDonald’s Australia Ltd. Allegations of sexual harassment had been made against a prospective franchisee during his nine month training period. A public perception that McDonald’s permitted such behaviour from franchisees in a system in which thousands of young women are employed would be very damaging for McDonald’s who terminated the relationship.

In the legal action which resulted, the Federal Court expressed grave concerns as to whether there was any substance in the allegations and awarded damages to the prospective franchisee for wrongful termination. The case clearly illustrates the importance of standards and integrity to McDonald’s and that, even at the cost of damages awarded against them, they were not prepared to tolerate any suggestion of such behaviour from a franchisee. It may be argued that McDonald’s concern for system integrity in this case inappropriately overrode the individual rights of the prospective franchisee – but the case clearly shows the extent to which McDonald’s will go in Australia to protect its public reputation.

There is another factor which transcends McDonald’s practices and which supports my confident prediction that the Washington scenario is highly unlikely to be repeated in Australia. This factor relates to the underlying ethics of the Australian franchising sector. Regular Australian attendees at IFA conferences are left with no doubt that American franchise systems are much better than their Australian counterparts at selling franchises. However, in terms of building better and stronger operational systems and relationships a convincing case can be presented that Australian systems have the edge.

The judgment in the Washington McDonald’s case does not explain the gross failure of the McDonald’s system that allowed that scenario to develop and continue – but it must, in part, reflect the selection of an inappropriate franchisee and a breakdown of operational and managerial audit processes. A focus on sales at the expense of operational and managerial due diligence will inevitably lead, from time to time, to dysfunctional outcomes.

It is not only the fact situation in the Washington McDonald’s case that is foreign to Australia. The particular legal action - a vicarious liability action by the employee against the franchisor – is virtually unprecedented in Australia. The only issue before the Washington court of appeals was whether McDonald’s was liable for the acts of franchisee. The basis for the vicarious liability action in this case was agency – that McDonald’s was liable as a principal for the acts of its agent, the franchisee. The franchise agreement contained the normal ‘boiler plate” provision to the effect that the agreement did not constitute a relationship of agency, joint venture, partnership or employment which clearly negated actual or express agency. However, an agency relationship may arise through an “ostensible” or “apparent” agency when, as was argued in this case, a principal (McDonald’s) leads a third party (the employee) to believe the wrongdoer (the franchisee) is an agent of the principal. For this basis of vicarious liability to succeed the person assenting apparent agency must have a subjective belief that the agent is acting for the principal.

The employee asserted that, as far as she was concerned, she worked for McDonald’s Corporation. She pointed to the omnipresent McDonald’s logo on her uniform, her paycheque, restaurant products and other materials. The action against McDonald’s failed as she testified that she knew she worked for the franchisee not for McDonald’s corporation and that the franchisee was the owner of the restaurant.

The employee’s father also claimed against McDonald’s on the basis of vicarious liability through apparent agency. He denied any knowledge that the restaurant was a franchise or that most McDonald’s were franchised and alleged that they allowed his daughter to work there believing that McDonald’s “stands for a uniform, quality, wholesome employment”. It was contended that “no person in their right mind would believe that McDonald’s did not control what happened at individual restaurants”.

The father’s action also failed, the court noting that more is required of the principal before its acts can create liability under the apparent authority doctrine:

“Beyond the general impression created by its advertising that McDonald’s restaurant offer a wholesome environment, [the father] points to no representations or acts by McDonald’s upon which he relied in believing that [his daughter] worked for the Corporation or that McDonald’s would ensure a safe working environment in its franchise restaurants. Using young people in advertisements, serving Happy Meals, sponsoring the Ronald McDonald house, and supporting Olympic athletes are not enough to create an apparent employment relationship between McDonald’s Corporation and its franchisees’ employees”.

The American influence on the Australian franchising sector – and indeed on the entire franchising world – is of course extremely significant. Business format franchising is a US invention and US developments in franchising remain highly influential.

There is general agreement that US recruitment techniques are highly effective in growing systems but a saga such as that outlined above suggests that growth without commensurate operational, managerial and relational disciplines can damage individuals as well as systems.

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