According to a 2019 parliamentary report, the Franchising Code of Conduct (Code) failed to adequately deter non-compliance by franchisors as some large and profitable businesses have been able to absorb penalties as a cost of doing business. In response, penalties under the Code have now increased significantly. From 15 April 2022, new penalties were introduced for specific provisions in the Code, and many existing penalties have doubled or increased. As a franchisor (and a franchisee), it's important that you remain up to date with the Code to stay on top of your rights and obligations. The new penalties The maximum liability for breaches of 7 particular obligations in the Code have increased from $66,600 to: for companies, $10 million,3 times the commercial benefit achieved from the non-compliant behaviour, or 10% of the franchisor's gross turnover (whichever is the highest amount); and for individuals (such as company directors), $500,000. These obligations include: disclosure of materially relevant facts. This is the obligation of a franchisor to notify their franchise network within 14 days of certain things occurring, some of which include a sale of the franchise system, change of their directors/shareholders, change of ownership of their intellectual property, ACCC proceedings against the franchisor, or proceedings made against the franchisor by 10% or 10 franchisees (whichever is lower); and the ban on franchisors restricting or impairing franchisees from forming an association. The other penalty provisions The maximum financial penalties for breaches of all other penalty-attracting obligations havedoubled from 300 penalty units ($66,600) to 600 penalty units (currently $133,200). It must be noted that not all breaches of the Code attract a penalty - the Code sets out which provisions attract penalties, and these include the obligation of the parties to a Franchise Agreement to act in good faith. The list of obligations under the Code attracting penalties has been expanded. Some of the new additions include: the obligation of a franchisor to provide statements of their marketing fund; the prohibition on a franchisor unreasonably withholding consent to the transfer of a Franchise Agreement (i.e.sale of a franchisee's business); and the prohibition on a franchisor terminating a Franchise Agreement because of an unremedied breach. Multiple breaches It is important to note that a separate penalty applies for every single breach. In other words, if a franchisor’s breach affects 10 different franchisees, they will face 10 sets of the same penalty. Information Statements The amendments to the Code have also changed the obligations of a franchisor to provide a copy of the prescribed Information Statement to a prospective franchisee. Instead of providing this within a reasonable time of that person expressing an interest in the franchise, it must now be provided within 7 days, and before formal Disclosure Documents are issued by the franchisor. Franchise Disclosure Register A separate amendment to the Code passed on 1 April 2022 was the requirement for franchisors to create a profile on the newly established Franchise Disclosure Register by 14 November 2022. The Register will be operated by [...]

Timeframes in Franchising   Australia's franchising industry is arguably the most heavily regulated in the world.    Timeframes are critical in franchising transactions. Some of the key timeframes under the Franchising Code of Conduct (Code) are as follows:   1.            Franchisees have a 7 day cooling-off period after entering into a Franchise Agreement or making a non-refundable payment to the franchisor (except on renewals, variations or transfers of existing businesses). This means that franchisees who have a last-minute change of mind or who can't secure finance can pull out of the deal. It does carry a penalty, with the franchisee being required to compensate the franchisor for a portion of the franchisor's reasonable costs.   2.            All prospective franchisees must be given a current Disclosure Document with a copy of the proposed Franchise Agreement and the Code at least 14 days before entering into a Franchise Agreement. This gives them time to do their due diligence and their own investigations into whether the franchise is the right choice for them.   3.            Franchisors must update their Disclosure Document annually within 4 months of the end of the franchisor's financial year (with some exceptions under the Code). Therefore, most franchisors operating on a standard Australian July-to-June financial year must complete their update by 31 October each year. A Disclosure Document must contain a statement confirming the franchisor's solvency, along with the franchisor's financial statements for the previous 2 financial years or an independent audit report of those statements. There are alternative obligations if the franchisor is new and hasn't existed for that length of time.   4.            If a franchisor operates a marketing or advertising fund, the fund must also be audited within the same timeframe to update the Disclosure Document unless 75% of the franchisees who contribute to the fund vote otherwise. This will be an audit of the fund's receipts and expenses for that financial year. The audited statement and audit report must be provided to franchisees within 30 days of its preparation.   5.            A franchisee has the right to request a copy of the franchisor's then-current Disclosure Document once every 12 months. The franchisor must provide this within 14 days. If the franchisor has relied on one of the exemptions under the Code and hasn't updated their Disclosure Document that year, the franchisor then has 2 months to update the Disclosure Document and provide it to the franchisee.   6.            A franchisor must notify their entire franchise network within 14 days of a 'materially relevant' fact occurring. Some of these things include:  a.                Investigations by a public agency (e.g. ASIC) or judgments against the franchisor.   b.                Legal proceedings instituted against the franchisor by at least 10% or 10 franchisees (whichever is lower).    c.                Change of ownership or control of the franchisor, their intellectual property or the franchise system.    d.                The franchisor becoming externally administered. 7.            If a franchisee wants to sell their business, they need the franchisor's consent. The franchisee must provide the franchisor all the information the franchisor reasonably requires to consider the sale. The franchisor then has 42 days to advise whether or not they consent to the sale. Once the franchisor gives consent they then have 14 days to withdraw it, but they must have a reasonable basis for doing so.   8.            A franchisor can terminate a Franchise Agreement if the franchisor gives the franchisee a written breach notice and the franchisee doesn't remedy the breach accordingly. If the franchisee remedies the breach, the franchisor cannot rely on that breach to terminate the Franchise [...]

The Australian Competition and Consumer Commission (ACCC) has introduced a new class exemption to take effect in early 2021. This will allow franchisees to collectively bargain and negotiate with their franchisor without having to first seek ACCC approval. It means a group of franchisees of any size can negotiate together with their franchisor about common issues such as terms, conditions and/or prices. The exemption will also extend to: small businesses with a turnover less than $10million in the preceding financial year collectively negotiating with their suppliers, processors and customers; and fuel retailers (regardless of turnover) collectively negotiating with their fuel wholesaler. Until now, collective bargaining was a breach of competition laws and carried significant penalties. Collective bargaining required an authorisation or notification to be obtained from the ACCC before engaging in it. The new exemption has been introduced because the ACCC is satisfied that this conduct is unlikely to substantially lessen competition or is likely to result in a public benefit. This exemption will result in time and cost savings for both franchisors and franchisees, and will benefit all parties involved through a much simpler and quicker process: Franchisees may be able to negotiate better terms and conditions that they may have been unable to negotiate on their own. Franchisees will be able to share their costs of negotiation across their group. Franchisors will save time and costs negotiating with a group, rather than multiple times and with each franchisee individually. Importantly, these changes will not force franchisors to collectively negotiate with franchisees if they do not want to. It is voluntary and will be the franchisor's choice whether to negotiate with a group of franchisees, or with each franchisee individually. Moving forward, before engaging in collective bargaining, the parties will only need to fill out and lodge a simple one-page form with the ACCC, free of charge. Legal protection will then start automatically. The team at Salerno Law are experienced in acting for both franchisors and franchisees in all aspects of franchising law. Get in contact if you need our assistance.   By Luke McKavanagh Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.   DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.  

Following the March 2019 release of the Parliamentary Joint Committee's Fairness in Franchising Report, the government has now released a draft set of proposed changes to the Franchising Code of Conduct (Code). These changes endeavour to restore public confidence in the franchising industry by giving further rights, balances and protections for franchisees. The proposed changes The changes are rather extensive: A "Key Facts Sheet" will need to accompany a franchisor's Disclosure Document. This summarises certain items and information in the Disclosure Document and Franchise Agreement. A franchisee's cooling-off period will be extended from 7 to 14 calendar days: This right will also apply to re-sales of franchised businesses by existing franchisees. This will have big implications for business sale transactions and Business Sale Contracts will need to be drafted carefully to cater for this. In certain circumstances the franchisee's cooling-off period will be postponed if the franchisor holds the Head-Lease of the business premises (giving the franchisee a Sub-Lease or Licence to Occupy) and then provides the franchisee with a copy of the Lease after entry into the Franchise Agreement. Details about the rebates and commissions a franchisor receives from suppliers must be expanded upon within the Disclosure Document. This will include how they are calculated and shared with franchisees. Franchisors will be banned from charging a franchisee for the franchisor's legal costs of preparing and negotiating the Franchise Agreement. A franchisor will however be permitted to charge a franchisee an upfront set amount in order to cover their legal costs. There will be additional disclosure obligations and restrictions on a franchisor's ability to require a franchisee to incur the costs of items of capital expenditure. Capital expenditure includes things during the course of the Franchise Agreement such as upgrades/refurbishments to signage, equipment, vehicles and business premises. Disclosure obligations regarding marketing/advertising funds have been expanded. Penalties have been added for breaching these provisions. Voluntary arbitration will be introduced in addition to mediation for resolution of disputes. This means that the franchisee and franchisor must both agree to arbitration. In contrast to mediation where the mediator simply facilitates discussions and it's up to the franchisee and franchisor to reach an agreed resolution, an arbitrator acts like a judge and can make a decision which is binding on the parties. A franchisor cannot reject a request for mediation with multiple franchisees at once (known as 'multi-party' mediation). Mediations and arbitrations will be overseen by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). Franchisees will now be entitled to initiate negotiations for an early exit from the Franchise Agreement. A franchisor must give reasons if they refuse to agree to an early exit. If a franchisor wishes to terminate a Franchise Agreement for 'special circumstances' such as the franchisee's fraud, bankruptcy/insolvency or failing to hold a licence to carry on the business, then the franchisor must give the franchisee 7-days' prior notice. This allows time for the franchisee to start the dispute resolution procedure. There will be restrictions on a franchisor changing [...]

A McDonald's Queensland franchisee has been ordered by the Federal Court to pay penalties totalling $82,000 for contraventions of the Fair Work Act 2009 (Cth). The multisite operator of 6 restaurants refused to let an employee use the toilet and drink water outside of 10-minute scheduled breaks. The franchisee also threatened young staff on Facebook when they complained. Justice John Logan categorised this "sinister" threat as having "a quality of cruelty". The penalties the franchisee was ordered to pay consisted of $72,000 to the Retail and Fast Food Workers Union who initiated the legal proceedings and $10,000 to the former employee. There are currently talks about the Retail and Fast Food Workers Union initiating a broader class action by up to 250,000 employees against McDonald's regarding similar issues. This judgment acts as a timely reminder that all employers must ensure that they strictly comply with all workplace laws. Not only do employers face the possibility of claims by employees, but the Fair Work Ombudsman can also undertake random inspections and audits of businesses. Franchisors in particular should pay careful attention to whether their franchisees are complying with workplace laws. The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) holds franchisors and holding companies responsible for underpayments and workplace law breaches by their franchisees or subsidiaries if the franchisor or holding company: have a significant degree of influence or control over the affairs of their franchisees; knew, or reasonably should have known, about the contravention; and failed to take reasonable steps to prevent it. This means that if a franchisee underpays an employee, fails to keep proper employment records or contravenes another workplace law (for example, discrimination or bullying) then the employee can potentially make a claim against the franchisor. The Fair Work Ombudsman can also institute proceedings against the franchisor. In the eyes of the law the franchisor may be seen as the party at fault, responsible and liable to pay compensation. The team at Salerno Law are experienced in acting for: franchisors and franchisees in all aspects of franchising law; and employers and employees in all aspects of employment law. Get in contact if you need our assistance.   By Luke McKavanagh Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.   DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.

Franchising is often considered by businesses wishing to expand. It's a process of duplicating branding and a business model with a proven track record for success. Setting up and establishing a franchise system can be a sizable task, and the Australian franchising industry is arguably the most heavily regulated in the world. There are some important things to first be taken into account when considering franchising your business. Each have their pros and cons. Regulatory compliance   The Franchising Code of Conduct (Code) sets out what constitutes a Franchise Agreement, together with other rules and regulations which must be followed. Compliance is actively monitored by the Australian Competition and Consumer Commission who can issue substantial penalties for non-compliance. This means that franchising is a very structured industry, which can be appealing to both franchisees and franchisors because each will know what to expect. There is an inherent power imbalance between franchisors and franchisees in a franchising relationship. The regulations are therefore weighted in favour of franchisees in order to 'even-out' this power imbalance. To a certain extent, prospective franchisors should therefore be prepared to be limited in what they can and cannot do. Disclosure Documents The Code requires franchisors to maintain a current Disclosure Document, which must generally be updated annually. The purpose of a Disclosure Document is to provide prescribed information about the franchise system in order to assist a franchisee to make an informed business decision about whether or not to enter into the franchise. It contains information about the franchisor's financial position, the fees a franchisee will expect to incur during the course of the franchise relationship and details of past and present franchisees. Disclosure Documents are highly regulated. As such, those wishing to franchise a business model must be prepared to provide prospective franchisees with a substantial quantity of information about the franchised business and to ensure that this is kept up-to-date. Control Franchising a business model can be appealing because of the high level of control a franchisor will hold over the operation of businesses by franchisees. This control is essential in order to maintain consistency across the franchise system. Franchisees must generally follow all of the franchisor's systems, procedures and directions about how to operate the business. These can change from time to time. The Code does however require a franchisor to act in good faith. This means a franchisor must act reasonably when exercising their control, placing certain limits on how far this control may go. There are also restrictions on directing franchisees to incur certain types of capital expenditure. The relationship between a franchisor and franchisee contains complex dynamics. Franchisors should be prepared to encounter franchisees of all personality types. Some franchisees will be more amendable to control than others, meaning franchisees may not always be cooperative. Consistency Consistency ensures the success of a franchise system and that the brand maintains its goodwill. This extends to products, services and branding. A restaurant franchise can be used as an example, where customers can: [...]

The Franchising Code of Conduct (Code) requires all franchise systems operating in Australia to maintain a Disclosure Document. Its format and content must strictly comply with the Code. Franchisors must provide this Disclosure Document to prospective franchisees at least 14 days before the franchisee enters into a Franchise Agreement. The purpose of a Disclosure Document is to supply key information about the nature of the franchise system and to help the prospective franchisee make an informed business decision about entering the franchise. It's not meant to contain all the information needed to make this decision, but rather, it acts as a starting point for a franchisee's due diligence investigations. Some key things in a Disclosure Document include: Warning Statement  The Warning Statement on the first page cautions prospective franchisees that franchising is a serious undertaking. It recommends they obtain independent legal, accounting and business advice. Franchisors must encourage franchisees to obtain this advice. The Warning Statement also reminds franchisees that they have a 7 day cooling-off period after entering into a Franchise Agreement or making a non-refundable payment to the franchisor (except on renewals, variations or transfers of existing businesses). This means that franchisees who have a last-minute change of mind or who can't secure finance can pull out of the deal. It does carry a penalty, with the franchisee being required to compensate the franchisor for a portion of the franchisor's reasonable costs. Preparation date The date the Disclosure Document was prepared must be on the first page. This must be accompanied by the signature of an officer of the franchisor. Franchisees can use this date to ensure the information contained within the Disclosure Document is current and up-to-date. Franchisors must update their Disclosure Document annually within 4 months of the end of the franchisor's financial year (with some exceptions under the Code). Therefore, most franchisors operating on a standard Australian July-to-June financial year must complete their update by 31 October each year. Franchisor's details The business experience of the franchisor's officers and the duration the franchise system has operated in Australia provides an insight to the experience of the system. Prospective franchisees can judge whether the franchisor has a satisfactory level of knowledge and experience in the industry, which is especially important for new systems. Franchisors must disclose certain types of litigation they (and their directors) have been involved in, along with any involvement by their officers in previous failed franchise systems. Litigation can indicate unhappy franchisees, and may act as a warning flag that there are internal issues with the operation of the franchise system. Franchisee details Contact details for all current franchisees within the franchise system and those who have left during the last 3 years (and the reason for doing so) are an essential element of a prospective franchisee's due diligence enquiries. Prospective franchisees should contact a selection of these current and ex-franchisees to assess franchisee-satisfaction with the franchisor's training, support and systems. Large numbers of franchisees who have been terminated or who have left [...]

Australia's franchising industry is continuously growing. It is also arguably the most heavily regulated in the world. Franchising is not itself a business, but rather, a way of doing business. A franchisor is someone who has achieved a proven system for success through their unique business model and branding, and has chosen to replicate that system by franchising. A franchisee is someone who has recognised that success and has opted to operate a business under the franchisor's branding, systems and procedures. The franchisor and franchisee then enter into a Franchise Agreement to set out the terms and conditions of this business relationship. The key law regulating franchising is the Franchising Code of Conduct (Code). It contains the definition of a "Franchise Agreement" where 4 elements must be present for this to exist: there is an agreement which is written, oral or implied; and one person (the franchisor) grants to another person (the franchisee) the right to carry on a business offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor; and under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used or licensed by the franchisor or specified by the franchisor; and under which, before starting or continuing the business, the franchisee must pay or agree to pay the franchisor a fee. This can include an initial capital investment, payment for goods or services, or a royalty fee, but the fee excludes payments for goods or services supplied on a genuine wholesale basis or repayment of a loan. If it looks like a duck, walks like a duck and quacks like a duck, then it probably is a duck. The same applies to a Franchise Agreement. It doesn't matter what the contracting parties call the agreement, for example, a Licence Agreement or Distribution Agreement. If the agreement and the business arrangement between the parties meets all 4 criteria under the Code, it will be a Franchise Agreement. When there's a Franchise Agreement, it will be governed by the Code and certain rules must be complied with. The Franchising Code of Conduct The Code regulates the relationship and conduct between franchisors and franchisees towards each other. Compliance with the Code is overseen by the Australian Competition and Consumer Commission (ACCC) who actively monitor and enforce compliance. It essentially exists to even-out the power imbalance in a franchise relationship. Franchisors have much more power in the relationship, so the Code places limits on this power. At the same time, the Code ensures both franchisors and franchisees act fairly. The Code endeavours to ensure that a franchisee is made aware that entering a franchise is a significant monetary and long-term commitment. Franchisees must be given some of the key information needed to assist them to make an informed decision as to whether the franchise model is a viable investment. The basic rules about franchising There are [...]