Parliamentary Joint Committee Report on Fairness in Franchising
- The Parliamentary Join Committee (Committee) released its long-awaited report on Thursday 14 March 2019.
- The Committee has made 71 recommendations for change to laws related to franchising, including but not limited to the Franchising Code of Conduct (Code).
- Retail Lease recommendations were specifically highlighted by the Committee.
- Structural recommendations to the franchise process in respect of transparency, disclosure and termination rights were a priority for the Committee.
- The Committee also recommended extending the small business unfair contract provisions to franchise relationships.
- Extending dispute resolution to binding arbitration awards under a newly formed Franchising Ombudsman was another significant recommendation of the Committee.
- The Federal Government is yet to respond to the report.
Main Changes Recommended by the Parliamentary Joint Committee
Evidence to the inquiry revealed a substantial amount of intimidatory behaviour and misconduct by Franchisors. Accordingly, the Committee has recommended that the whistleblower protection laws be amended to apply to Franchisees and their employees in respect of franchise arrangements.
New Powers for the ACCC
The Committee heard evidence of the repeated sale of single sites of failed franchise arrangements to new Franchisees. This practice, known as “churning and burning”, usually occurs where an outlet is inherently unprofitable and unviable. Notwithstanding this, Franchisors continue to profit from large upfront franchise fees by “churning and burning” these sites. The Committee has recommended that the Australian Competition and Consumer Commission (ACCC) be given power to intervene and prevent the marketing and sales of franchises where a Franchisor shows a track record of “churning and burning”.
Upfront and Pre-contractual Disclosure
The Committee reported that evidence to the inquiry revealed significant concerns about pre-contractual disclosure, the accuracy of earnings information and the abuse of marketing fees and funds by Franchisors. The Committee has recommended amendments to the Code, to provide that Franchisors must provide the information statement to Franchisees as a separate document, and that such document also be subject to the disclosure and cooling off provisions. Additionally, the Committee has recommended that the Franchisor or a Franchisee selling its franchise must provide the prior 2 years’ business activity statements, profit and loss statement and balance sheet, and an assessment of the labour costs, in the event that a particular franchise business is being sold. If the franchise is a greenfield franchise, then the Franchisor must provide the same documents of a comparable franchise to the greenfield site. The recommendation includes that the disclosure of financial information be separate to other disclosures and include a statement to the effect that the information is accurate, correct and compliant with the Code and Australian accounting standards.
In respect of marketing, the Committee has recommended significant changes to the Code in circumstances where the Franchisee is to contribute to advertising and marketing activities, including the provision of accurate financial statements for the marketing fund to be provided within 30 days of the end of each quarter.
Registration of Franchise
The Committee believes that registration is an important step in achieving market transparency and that a public franchise register, with Franchisors providing updated disclosure documents and template franchise agreements annually, in accordance with the Code, should be required, and has recommended that the Franchising Taskforce investigate options for such a register.
The Committee has recommended additional disclosure requirements for guidance on employment matters, especially awards, minimum wages and overseas workforce issues, to be developed by the Fair Work Ombudsman.
Transparency and Accountability on Third Line Forcing and Supplier Rebates
The Committee has made recommendations for more transparency where third line forcing is required by the franchise, and transparency in relation to rebates to the Franchisor.
Unfair Contract Terms
The Committee has made a major recommendation that unfair contract terms contained in franchise agreements be subject to the provisions of the Australia Consumer Law, including civil penalties and infringement notices. This change would provide significant protections to Franchisees and would align the franchise system to the general provisions applicable to small businesses.
Specifically, the Committee recommended that the Federal Government should amend the Code to require that where any franchise agreement provides for an entitlement of the Franchisor to unilaterally vary the terms of a franchise agreement, such amendment can only be made with the agreement of the majority of Franchisees within the same franchise system, or representatives elected by a majority of the Franchisees within the same franchise system.
Cooling Off Period
The Committee recommended that the Code be amended to clarify that the cooling off and disclosure periods are measured in calendar days, and that a 14 day cooling off period be applied after certain specified events.
The Committee reported that exit arrangements are essential for ensuring that one party is not overly penalised when the business relationship ends and noted that the Code has for a long time only provided termination rights to Franchisors. In order to even up the rights of both parties, the Committee has recommended that the Code include provisions for a Franchisee triggered exit, as well as providing the right for a Franchisee to terminate a franchise agreement, and that restrictions be applied in some circumstances for termination by the Franchisor in relation to fraud and public health and safety.
The Committee has recommended the Franchising Taskforce examine ways in which to amend the Code to include rights and payments to a Franchisee in relation to goodwill at the end of a franchise agreement.
The Committee reported that evidence to the inquiry included a litany of instances where the Franchisee alleged the Franchisor had failed to engage in good faith in the mediation process, knowing that the only alternative for the Franchisee was Court action, which could be prohibitively expensive. To address this issue, the Committee recommended consideration be given to the creation of a Franchising Ombudsman body, that could have enhanced powers, including binding arbitration powers under the Code, so that if mediation was not successful, an Ombudsman could make binding orders against either party. Further recommendations regarding a binding arbitration process were made.
Harmonisation of Industry Codes
The Committee made a number of recommendations regarding different industry codes across the oil industry, the automotive industry and the Code, aimed at harmonising or incorporating the different industry codes.
Retail Lease Arrangements
The Committee noted that the interaction between shopping centre Landlords, Franchisors and Franchisees is complex and, at times, fraught. The Committee singled out retail lease arrangements as a specific area for recommendation, including that the Franchisee be provided with full disclosure of both the Lessor Disclosure Statement and final Lease agreement, and that in certain circumstances a Franchisee be provided with rights to occupy the premises, notwithstanding a termination of the franchise agreement or alternatively, to withdraw from any Sub-Lease without penalty. Further, the Committee recommended changes to the Code which specifically address the Lease relationship and rights between Landlords, Franchisors and Franchisees.
The Committee made recommendations addressing amendments to the Code for the purposes of greater transparency in respect of capital expenditure requirements, and greater rights for Franchisees in respect of being able to make an appropriate return on investment within the franchise agreement, having regard to capital expenditure requirements.
Where to from here?
The Federal Government is yet to respond to the Committee’s report and, given the anticipated timing of the next Federal election, it is likely that even if there is a Government response prior to the election, it is unlikely there will be any legislative change until after the election.
For the full Joint Committee Report, click HERE.
18 March 2019