What you need to know about franchising compliance

A review into breaches of the Franchising Code of Conduct has led to long-overdue changes to the $182b franchise system, including new disclosure obligations.

Franchising is a system worth $182b that employs more than 594,000 people, according to the Franchise Council of Australia. It’s more than two years since the Senate referred an inquiry into the operation and effectiveness of the Franchising Code of Conduct to the Parliamentary Joint Committee on Corporations and Financial Services. The subsequent report confirmed disturbing practices in the industry, ranging from non-compliance with the code to false or misleading representations and unconscionable conduct. The committee listed 71 recommendations and, following a review by an inter-agency Franchising Taskforce, the government will start rolling out changes to the code from 1 July.

These changes add extra requirements for franchisors. Corinne Whelan, a senior lawyer and franchising specialist at LegalVision, believes they will also help to clarify the obligations of a board. “If you’re a director, or thinking about becoming a director of a franchised company, you need to understand how regulation is changing the traditional franchise model and what compliance will look like for you in the future,” she says.

An overview of the changes

Disclosure obligations: Franchisors must disclose more information concerning capital expenditure, marketing funds, rebates, earnings and, where relevant, leasing arrangements. The disclosure document must be provided in electronic or hard copy form at least 14 days before the franchise agreement is signed and include a fact sheet summarising the information.

Capital expenditure: The franchisor can’t compel a franchisee to spend significant amounts of money except in specific circumstances — if, for example, this expectation was spelled out in the disclosure document, is required by law or is supported by a majority of franchisees.
Marketing funds: The obligations concerning marketing and cooperative funds will stay the same. However, the code will replace the term “franchisors” with “fund administrators” to ensure the obligations also apply to individuals and master franchisors who operate a fund.
Early exit by a franchisee: Franchisees can now initiate negotiations for an early exit from the franchise agreement without giving a reason. However, a franchisor who opposes the move must explain why, and refusal to agree to an early exit after going through the usual dispute resolution processes could be considered a breach of the code’s good faith obligations or unconscionable conduct.
Termination by a franchisor: Franchisors can still terminate an agreement under the code’s “special circumstances” termination rights, although they must give notice to the franchisee at least seven days in advance and give reasons for their actions.
Cooling-off and transfer: The franchisee cooling-off period will be extended from seven to 14 days.
Legal costs: Franchisors can no longer ask the franchisee to pay all or part of the legal costs associated with the franchise agreement unless a specific dollar contribution is included in the agreement.
Retrospective variation: Franchisors can no longer vary the franchise agreement with retrospective effect unless a particular franchisee — or, where appropriate, a majority of franchisees — agree to the change.