Franchising – getting it right
In Australia, franchising is big business and a substantial part of the Australian economy: four percent of small businesses in Australia are franchises. 90% of Australian franchise brands originated in Australia and one-third of those brands have expanded to international markets around the world. The franchising sector employs 472,000 individuals and sales turnover is estimated to be $146 million.
Franchising in Australia has been the subject of scandals. There have been accounts of underpayment and exploitation of staff at convenience and pizza franchises in recent years. Most recently, the practices of Retail Food Group have been labelled exploitative. Stories of retirement savings lost and families shattered has pushed the parliament to launch an inquiry into the sector.
What laws apply?
Franchises are regulated through through a combination of the Australian Consumer Law (ACL), the Franchising Code of Conduct (the Code) and common law.
The Code offers the most complete set of rights and obligations for both the franchisee and franchisor. Last updated in 2015, the Code includes:
- Disclosure requirements;
- A good faith obligation;
- A dispute resolution mechanism; and
- Procedures for entering and ending a franchise agreement.
This results in a lengthy set of documents which include summaries of representations, requirements that franchisees have received independent legal, business and financial advice and a comprehensive franchise agreement to meet the ACL.
The Code itself is regulated and enforced by the Australian Competition and Consumer Commission (ACCC) and a breach of the code may result in an infringement notice and possible financial penalties.
In March 2018, in the wake of the scandals discussed above, the Senate started an inquiry into the operation and effectiveness of the Franchising Code of Conduct to the Parliamentary Joint Committee (Committee). In March this year, the Committee handed down its Fairness in Franchising report.
The recommendations by the Committee have focused on the following key areas of transparency in transacting, improving the balance of power and increasing enforcement and penalties for non-compliance.
Transparency in transacting:
The Committee identified as a key problem that there is inadequate disclosure by franchisors of relevant data when entering into a franchise agreement and in the ongoing franchise relationship. The Committee acknowledged the high volume and detail of information under current franchises, so its recommendation in this area is quality over quantity of information.
The Committee is also very concerned about requiring franchisees only to acquire goods and services from select suppliers. While that helps with a unified look & feel and experience across the franchise, it’s complicated when the franchisor receives rebates from suppliers.
SO the Committee recommends amending the Code to stipulate that at least 2 years’ worth of information should be provided regarding areas such as cost prices, margins and whether products have historically been sold at a loss. As for supplier rebates, there would be greater transparency about the rebate and how much would be retained by the franchisor or used for the benefit of the franchise network.
The Committee also explored the possibility of opening a franchise register and requirements for franchisors to register copies of disclosure documentation and agreements annually.
Balance of Power
The Committee thinks that unequal power positions between franchisees and franchisors has led to exploitative or unfair practices.
To level the field, the Committee would like to limit franchisors’ ability to unilaterally vary franchise terms and policies. It would like variations to be approved by a threshold of franchisees.
The Committee would like to see the unfair contract terms regime expanded to better govern franchises. Currently, the regime is largely disregarded by franchisors looking to impose unfair terms and they are rarely challenged. The Committee would like unfair contract terms legislation to specifically apply to franchise agreements.
The power imbalance means that franchisees may be afraid to speak out. The committee recommends an extension of whistle-blower protection legislation to franchisees and employees.
The Committee is also concerned by certain unfair or exploitative terms. These include clauses that grant the franchisor discretion over volume and frequency of orders and charges for wastage and shrinkage payments. However, the Committee says that’s a decision for the ACCC.
Increasing enforcement and penalties
The Committee views many elements of the current Code to be sufficient but thinks the problem lies in the lack of enforcement and inadequate penalties.
So, the Committee would like the ACCC to have new powers, responsibilities and resources to investigate and enforce misconduct in franchising. The Committees is particularly concerned about repeatedly transferring a known unprofitable location – ‘churning & burning’ and the rapid sale of new franchise locations for upfront fees.
The Committee recommends a harsher penalty regime for breaches of the Code. This includes civil penalties for all breaches of the Code and increasing current penalties.
Although the recommendations are preliminary and subject to further development, there is strong support across the political spectrum for positive change within the sector.
To oversee many of these changes and better enforce existing regulations, it recommends the creation of a Franchising Taskforce as a top priority.
On 21 June 2019, the Minister of Employment, Skills, Small and Family Business announced the new franchising taskforce. The Taskforce is made up of senior officers from the Department of the Treasury, the Department of Jobs and Small Business, and the Department of the Prime Minister and Cabinet. The role and duties of the Taskforce is to advise the Minister for Small Business and the Federal Treasurer, in relation to the 70 remaining recommendations made in the Report. The Taskforce will coordinate the government’s response to the recommendations and will oversee consultation, industry engagement and contributions from relevant government bodies.
Talk to Bayston Group
If you are considering expanding your business through a franchise model, make a time to catch up with our Franchising Team (Al, Leisa and Tara). We can work through your plans making sure you are jumping through all the required hoops! We have several franchisor clients and plenty of experience to bring to the table.
If you are a potential franchisee looking at a Disclosure Document or Franchise Agreement, we can help you too. Although not generally negotiable it is important to understand exactly what you are signing up. We can save you a lot of heartache down the track! If you have any questions or would like further information, contact us today!