In recent months, a series of scandals has rocked Australia’s $170 billion franchising industry. Franchising giants like the Retail Food Group, Domino’s Pizza, 7-Eleven and Caltex have been accused of toxic business practices that prevent franchisees from succeeding. In March, the Parliamentary Joint Committee on Corporations and Financial Services opened an inquiry into the relationship between the master brand businesses and those running operations on the ground. The report is due by September 30, 2018. In the intervening months, here are five steps that you can take to make sure your franchise business is compliant, operates in good faith and is prepared for the results of inquiry.
Review compliance with the Franchising Code
Your business must comply with the Franchising Code as set out under the Competition and Consumer Act, 2010. The statute sets forth the information you must disclose to your franchisees. In addition, the law sets out the procedure for dispute resolution through the Office of the Franchising Mediation Adviser. It is a question of both documentation and actual practice.
Review your standard franchise agreement
Compliance with the Franchising Code requires more than a legally-compliant franchise agreement. While it is a very good place to begin your review, as a general principle the law requires that franchisees have sufficient information to make a rational financial decision about investing in a franchise. More specifically, the franchise agreement should include:
- A realistic estimate of likely financial performance of a franchise and worse- case scenarios;
- A summary of contractual rights and obligations of all parties, including termination rights and geographical exclusivity;
- Details of leasing arrangements and restrictions; and
- An estimate of expected running costs, including costs of goods required to be purchased through prescribed suppliers.
When things go wrong in the franchising relationship, the dispute often focuses on the accuracy and completeness of this disclosure.
Undertake a ‘health check’ with your franchisees to assess performance and satisfaction
Happy franchisees are much less likely to sue. Franchisors should be proactive in exploring the nature and quality of their relationships with franchisees. Three questions come to mind:
- Is record keeping sufficient to determine whether certain issues recur?
- Is there a procedure in place for dealing promptly with issues as they arise?
- Is responsibility for this task specifically assigned to someone?
This is your first line of defence, long before your business gets involved in a formal mediation process.
Review your process for selecting franchisees
To support your franchisee recruitment, your business should develop literature that discloses the structure and nature of your franchise and the relevant criteria that potential franchisees should fulfil in order to become a franchisee. Careful screening of potential franchisees is the other side of the equation. This is an important step to ensure a mutually productive and beneficial relationship. Pay particular attention to financial ability and managerial experience of a potential franchisee. A shaky partner is more likely to cause legal headaches in the future.
Review your occupational safety and health obligations
Make sure that you understand your occupational health and safety obligations toward your franchisees and their employees. This will require a review of your Franchise Agreement and Operating Manual and your actual operating procedures to ensure that ”paper” compliance carries through to “compliance in fact.”
Remember that workers who are injured on the job often look to the resources of the deeper-pocketed franchisor in addition to their immediate employer. The degree of responsibility faced by a franchisor in this situation may depend on the degree of day-to-day control of the actual conditions of employment that the franchisor exercises. The details of actual practice can make the difference.
As the Senate enquiry proceeds, the attorneys at Owen Hodge Lawyers would be happy to work with you to ensure that your franchise remains in compliance with the new guidance, both in the letter of the law and in its spirit. We endeavour to help you and your franchisees toward the kind of transparent, balanced and prosperous partnership that is the goal of a franchise arrangement. Please call us at your earliest convenience to schedule a consultation at 1800 770 780.