Franchise Industry – What now?

Posted by Luke Mitchell on 22 May 2019
Franchise Industry – What now?

Recent investigations by several media outlets has led to increased scrutiny of the Franchise sector, with investigations uncovering rampant underpayment of wages and exploitation of staff.

Given there are approximately 79,000 franchises nationwide which employ 470,000 direct employees, it is apparent reform is required to protect employees and employers alike.

 

Following these media investigations, in March 2018 the Senate referred to the Parliamentary Joint Committee on Corporations and Financial Services an enquiry into the operation and effectiveness of the franchise sector.  The enquiry was charged with examining the franchising regulatory framework and what appears to be an imbalance of power between franchisor and franchisee. 

As part of the enquiry, Retail Food Group (RFG) was used as a case study as they were deemed to “illuminate many of the issues identified in franchising in Australia”. RFG franchise such well known brand names as Gloria Jeans, Brumby's Bakery, Crust Gourmet Pizzas, Michel's Patisserie and DCM Donuts.  The findings by the Joint Committee with regard to the behaviour and practises of RFG give a clear picture as to the depth of serious issues the enquiry examined and highlight the obstacles faced  by the typical franchisee trying to run a profitable business, pay their staff and move their business forward. 

In finalising the Parliamentary enquiry into the $170 billion franchising sector, there are recommendations for a total overhaul of the sector. The final report likens the behaviour of franchisors to being comparable to the poor corporate governance exhibited by the financial services sector and highlighted in the recent Royal Commission.  The report also notes that effective and efficient franchising is critical to the health of the broader economy as it contributes around 9 per cent to total GDP and is a major contributor to the economy. 

Three points in the Executive Summary are worthy of note:

  • Franchising taskforce - The committee recommends that the Australian Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the committee's recommendations. The Franchising Taskforce should include representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the ACCC.

  • Industry associations - The Franchise Council of Australia does not appear to provide a balanced representation of franchisor and franchisee views. The committee therefore recommends that the relevant government departments and agencies be alert to the risk that franchisors and their representatives can capture the policy and regulatory debate. The committee also urges franchisees to develop a strong national association.

  • Unfair contract terms laws - Given the inherent power imbalance in franchising, many franchisees have suffered as a result of unfair contract terms. The unfair contract terms laws have had limited effect on franchising. The committee considers it unacceptable that franchisors are able to retain unfair contract terms (such as unilateral changes to the business model or setting menu prices below cost) in their franchise agreements without penalty, and therefore have little incentive to remove such terms. The committee therefore recommends that the Franchising Taskforce examine the appropriateness of making unfair contract terms in franchise agreements illegal and for civil penalties to be established.

There are many things to consider before you enter into any franchise agreement.

We specialise in providing contract advice prior to you taking the plunge.  Contact us today to discuss your legal needs.

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