Getting down to business: Coalition's review of the franchise sector means potential penalties for franchisors but may also deliver national consistency

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[co-author: Rose Bollard]

Consistent with its pre-election campaign promise, the Coalition Government has announced that this year it will review and amend the Franchising Code of Conduct (Code) to improve protections for small business franchisees. It will implement some recommendations made in the 2013 Wein review and amendments may include the introduction of penalties of up to $50,000.  If successful, this will be the first time that penalties have been introduced into the compulsory industry code.

Background

As we reported last year, the Code was recently subject to a major review (the 2013 Wein review) and the previous Federal Labor Government subsequently released a response to the review, accepting in full or in principle the majority of the recommendations made.  However, due to the timing of the 2013 election, the proposed changes were never legislated.  The current Government is now eager to introduce a number of changes to the Code to assist franchisees who frequently complain of a significant imbalance of power in their relationships with franchisors.

Key issues and changes

Small Business Minister Bruce Billson has cited the following as key issues to address in franchising regulation:

  • the need for a nationally consistent regulatory framework to prevent franchisees from "jurisdiction shopping" and to avoid state-based regulatory remedies (of specific concern to the Government are the plans of the South Australian Government to offer greater protections to franchisees);
  • the lack of resources for dispute resolution between franchisees and franchisors;
  • the power imbalance between small business franchisees and franchisors, along with the need for stronger legal protection for franchisees; and
  • the level of red-tape currently existing in the industry.

It is expected that there will be amendments in the areas listed above in addition to the major potential change which is the introduction of fines for breaches of the Code. The Minister has suggested potential fines of up to $50,000 may be imposed for "serious but less egregious" breaches, while other major fines would be imposed for "egregious" breaches. 

The Government has also confirmed that it intends to extend unfair contract protections to small businesses which will affect the franchise sector as well.

Consequences for business

The changes that are likely to be introduced by the Government will mean that franchisors will need to be more diligent in their management practices and their relationship with their franchisees to avoid these penalties. Nevertheless, if the approach to franchise regulation becomes more nationally consistent across the states, there will be a major benefit to franchisors.