Report on senate inquiry into franchising sector published

Posted By on 18/03/19 at 5:37 PM

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services released its report entitled ‘Fairness in Franchising’.

The first recommendation of the Report is that an inter-agency Franchising Taskforce be established to examine the feasibility and implementation of a number of the Committee’s recommendations. It is recommended that the Taskforce include representatives from the Department of Treasury, the Department of Jobs and Small Business and, where appropriate, the Australian Competition and Consumer Commission.

Many of the other recommendations in the Report are not clear recommendations for change but rather recommendations that the Taskforce further examine the issues and potential reforms. However, the Report did directly recommend some reforms that, if adopted, may have a practical impact on franchising in Australia.

These include:

  • Disclosure documents and franchise agreements must be provided in both electronic and hardcopy forms.
  • Actual business activity statements (for the past 2 years), financial statements and an assessment of labour costs for the franchise unit must be provided in the disclosure document where a franchisee is acquiring an existing franchise. For new franchise units the franchisor must provide the same information relating to a comparable franchise.  Our comment on this recommendation is that many if not most franchisors provide similar information in order to sell a franchise. Provision of actual financial records for franchise units is often a useful and necessary part of the sales process. The recommendation does not address how a new franchisor would  satisfy this requirement. We assume an exemption would apply if there are no comparable franchises.
  • Financial information relating to the franchise business must be provided with the disclosure document.  Many franchisors provide financial information separately. This information would need to also be attached to the disclosure document.
  • Franchisors must provide franchisees quarterly financial statements for marketing funds within 30 days of the end of each quarter.
  • Disclosure must include a copy of guidance material (published by the Fair Work Ombudsman) on employment matters, especially Awards, minimum wages, and overseas workforce issues.
  • Supplier rebates, commissions and other similar payments must be disclosed as a percentage of the full purchase price on each transaction.  Presently, the Franchising Code only requires disclosure of the names of the suppliers which provide rebates and of whether the rebates are shared by the franchisor with franchisees.
  • If a franchise agreement provides its terms can be unilaterally varied by the franchisor, this will require the agreement of a majority of the franchisees of the system or representatives elected by the franchisees of the system (eg a Franchisee Advisory Council).
  • The cooling off period is extended from 7 to 14 days. Further, if premises is leased and the lease is not provided until after the franchise agreement is entered into, the cooling off period will not commence until a copy of the lease is provided to the franchisee.
  • The cooling off period also applies to transfers, renewals and extensions.
  • Certain “special circumstances” (eg franchisee insolvency) permit immediate termination under the Franchising Code. It is recommended that 7 days notice of termination be required in these circumstances and that, if a mandatory dispute resolution procedure under the Franchising Code is triggered, the termination process be suspended pending completion of that procedure.  As a practical point, many franchisors will hold off on enforcing a termination pending completion of the mandatory dispute resolution procedure under the Franchising Code. The proposed change would make this mandatory.
  • Termination in the special circumstance of fraud will require the franchisee to be convicted of fraud in connection with the operation of the franchise.
  • Termination in the special circumstance of endangering public health or safety will require the franchisee to be served with a permanent closure direction for the franchise by a relevant government body or failure to remedy work health and safety orders or notices.
  • Introduction of a class exemption to make it lawful for franchisees to collectively bargain with their franchisor.
  • The option of binding arbitration be added to the dispute resolution procedures under the Franchising Code. This would not exclude court action.
  • Franchisors who commence court action must demonstrate to the court’s satisfaction that the matter cannot be resolved through mediation. Otherwise, the court should order the parties to mediate.
  • Except where incorporated into a joining fee, franchisors are prohibited from passing on to prospective franchisees the legal costs of preparing, negotiating and executing documents.  The reference to joining fee may relate to a fixed fee to cover these amounts. The recommendation appears to be focussed on preventing franchisors from recovering all additional legal costs where documents are negotiated and the legal fees exceed the fixed/joining fee. It is difficult to see how this change would be easily enforced as franchisors can choose their initial franchise fee and can increase the same at their discretion. The regulator would require evidence any increase was made to ensure all legal costs would be covered by the franchisees.
  • A ban on both unilateral and retrospective variations to terms and conditions.
  • A ban on franchisors charging wastage and shrinkage payments.
  • A duty on franchisors to provide training on the Franchising Code.
  • The franchisor must provide the ACCC’s franchisee manual to prospective franchisees with the disclosure document.
  • The ACCC to develop an website similar to the Australian Securities and Investments Commission’s MoneySmart website to address franchisee issues including examples of detrimental outcomes experienced by franchisees, information on Fair Work rights, minimum wage laws and Awards, and provisions that apply to migrant workers.
  • The disclosure document must include a reasonable estimate of personal workload to be undertaken by the franchisee (or their nominee or manager) in running and operating the franchised business.

Other matters referred for further consideration by the proposed Taskforce, recommendations relevant to the Oil Code and the limited recommendations regarding penalties and enforcement are not discussed here.

It is obvious that further clarity is required around many of the proposed changes and how they would operate.

We will provide further commentary if and when further action is taken on the recommendations.

Peter Buberis

Peter Buberis Principal

Peter heads our franchise team.

Peter has extensive experience acting for both national and international franchise systems with a strong skill set around the expansion of franchise systems. ... Read More