Recap of the regulatory landscape
Commercial arrangements classed as ‘franchise agreements’ will fall under the Franchising Code of Conduct, and be subject to a high level of regulatory compliance. Most of the compliance burden falls on the franchisor, who must for instance, give the franchisee comprehensive disclosure, allow a 14 day wait period before the franchise commences, permit termination within a 7 day cooling-off period, and give the franchisee an opportunity to obtain legal/business advice.
The sector has been battered
The sector has experienced difficult years of late, with many franchisees struggling in the face of declining sales, high franchise fees, high occupancy costs and high wage costs. Recent scandals have also placed some high profile franchise systems in the spotlight for the poor treatment of franchisees and the systematic underpayment of employees. Retail Food Group (Gloria Jeans, Brumby’s, Donut King), Harvey Norman and Domino’s Pizza have all received less than flattering press lately.
2019 Parliamentary report into the franchising sector
Prompted by these developments, a parliamentary joint committee report into the franchising sector was published in March 2019, which identified major structural and cultural issues. The report contained over 70 recommendations aimed at the substantive reform of the sector.
The report recommended that an inter-agency “Franchising Taskforce” be established to implement the many recommendations. Consequently, it is hard to assess the full extent of possible legislative reform until the taskforce takes action. However, we consider that the following recommendations are likely to receive taskforce endorsement:
- Quarterly reporting on franchise marketing funds.
- Additional disclosure of financial information relating to the sale of businesses within the franchise system, specifically targeting systems that ‘churn’ (repeated sale at same site of a failed franchise to a new franchisee) and ‘burn’ (continually opening new outlets, some of which are not viable, to profit from upfront fees).
- Extending existing Whistleblower protections to franchisees reporting breaches of the Code.
- Increasing the cooling-off period to 14 days.
- Giving franchisees express termination rights where a substantial change occurs to franchise operations after a change in franchisor ownership, and also where a ‘shock event’ occurs, such as where poor franchisor performance causes the franchisee financial loss.
We will provide a further update if the Code is amended to include any of the recommendations.