Report calls for overhaul of franchising industry

Parliamentary inquiry into Australia’s franchising sector calls for significant reform.

The parliamentary inquiry into Australia’s franchising sector has called for significant changes to the national Franchising Code of Conduct and to the responsibilities and powers of the ACCC.

Released today, the report identified “systematic exploitation” of franchisees in Australia, stating the current regulatory framework fails to provide adequate protection against such practices.

“The current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance,” the report said, noting “wage theft continues to occur in many franchises: partly due to the business model franchisors operate and partly due to a range of socio-cultural problems”.

The committee recommends government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the committee’s recommendations, made up of representatives from the Department of the Treasury, the Department of Jobs and Small Business and, where appropriate, the ACCC.

The report has called for a suite of changes to the franchising sector, including giving the ACCC more responsibilities and greater enforcement powers, including intervention powers to target egregious behaviour by franchisors.

The report recommends the whistleblower protection regime, recommended in its September 2017 report, Whistleblower Protections, apply to franchisees, their employees and that breaches of the Franchising and Oil Codes of Conduct by franchisors be included in the definition of disclosable conduct.

The report recommends the taskforce examine making unfair contract terms contained in small business contracts and franchise agreements illegal; and calls for civil pecuniary penalties and infringement notices to be applied, where the provision of a standard franchise agreement to a small business contains an unfair contract term.

It also recommends giving franchisees the right to exit franchise agreements under certain conditions, and has called for more accountability on marketing funds.

The inquiry was also critical of the Franchise Council of Australia (FCA), stating it does not provide a balanced representation of franchisor and franchisee views, due to membership composition, urging franchisees to develop a national association.

“The actions of certain franchisors have caused enormous reputational damage to the sector,” the report said.

“This needs to be rectified for the benefit of the entire franchising industry. The proposed reforms outlined by the committee in this report are substantial, and many elements are interdependent.”

The committee recommends that, until a suitable body exists to adequately represent the interests of franchisees, the Franchising Taskforce examine how consultation processes associated with franchising policy, regulation and legislation can achieve an appropriate level of input from franchisees, including whether it is appropriate for a franchisee representative to be a voting member of the franchisor’s board.

However, the FCA has welcomed the report of the inquiry, and says it is already addressing some of the concerns raised through the inquiry process.

FCA CEO Mary Aldred said FCA looks forward to working to effectively implement both the changes it has underway and other recommendations of the inquiry.

“The FCA has made it clear that we will not tolerate breaches of the franchising code or consumer law by either franchisors or franchisees, whether or not they are FCA members.

“Any breach of the law by a franchise business reflects on the reputation of the majority in franchising whom do the right thing.”

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell said recommendations in the report on the inquiry into franchising addressed the concerns raised by her office in submissions and consultations with small business franchisees.

“Franchisors continue to breech the ‘good faith’ obligation of the Franchising Code of Conduct and include unfair contract terms in franchising agreements without penalty, further entrenching the power imbalance between the franchisee and franchisor,” Carnell said.

“At the moment, if a franchisor breaches the code, franchisees take no action for fear of repercussions, such as losing their franchise agreement. If they do go to mediation, the franchisor brings a legal team, while the franchisee is often unrepresented and suffers because of this.

“We agree all franchise agreements must comply with unfair contract term legislation; the majority of calls my office receives from franchisees are seeking assistance in a contract dispute.”

Carnell said the committee’s recommendations to make penalties significant and charging the ACCC with investigating standard form contracts and applying penalties where a contract contains an unfair clause will greatly improve the position of franchisees in their dealings with franchisors.

“Disclosure is paramount and we welcome the recommendations to provide detailed financial and performance figures, workplace relations commitments and other key data to help make an informed decision to become a franchisee.

“Recommendations to ensure discounts on bulk buying negotiated by the franchisor are accessible to its franchisees should address this inherent poor behaviour.

“Having recently taken on the function of assisting franchisees with disputes, we welcome the dispute resolution clauses being strengthened.

Carnell said the Ombudsman supports the reforms to include arbitration where mediation has proved unsuccessful so that small businesses can continue to access lower cost, timelier dispute resolution services.

Click here for further information on the inquiry.

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