Franchising- an opinion on the recent report from ACAPMA
The recent report of franchising from the Australian Senate may end up being a watershed for the Australian franchising sector. Below is some observations on the report from the ACAPMA newsletter.
Fairness in Franchising (and Oil Code)
Recently, the Joint Parliamentary Committee charged with reviewing the operation and effectiveness of the Franchise Code (and the Oil Code) released its long-awaited report. The release of the report was delayed on four separate occasions – six months in all – because of the large number of submissions received.
While the findings of the 370-page report focus largely on the Franchise Code, there are some significant recommendations for changes to the operation of the Oil Code. On 22 March 2018, the Australian Senate established a Joint Parliamentary Inquiry into the operation and effectiveness of the Franchising Code of Conduct - with the report to be provided back to the Australian Parliament by 30 September 2018. The Inquiry followed on from a previous inquiry that was conducted 10 years earlier. This 2008 Inquiry concluded that while some Franchisors were “behaving opportunistically”, issues associated with the Operation of the Franchise Code were “relatively isolated”. Arguably, a significant part of the motivation for the conduct of the 2018 Review related to suggestions that a significant part of the wage underpayment issue observed in some franchise networks over recent years was due to insufficient financial provision in franchise contracts.
The final Report of the Committee was released on 14 March 2019, almost six months behind the original reporting date set down by the Australian Senate. The six-month delay in delivery of the report was deemed necessary due to the large number of submissions that were received by the Committee – and the complexity of issues involved. The Report contains a total of 72 recommendations – the first of which is a recommendation for the establishment of an inter-agency Government Task Force (i.e. Franchising Task Force) to examine the feasibility and implementation of a number of the Committee’s recommendations.
The Franchising Task Force would comprise representatives from the Department of Treasury, the Department of Jobs and Small Business and (where appropriate) the Australian Competition and Consumer Commission.
“Curiously, the recommended Task Force does not include any representation of industry and nor does it discuss how the task force might consult with industry stakeholders around implementation of the Committee’s recommendations”, said ACAPMA CEO Mark McKenzie.
The Executive Summary of the report notes that, by contrast with the 2008 Inquiry, the evidence provided in this latest inquiry indicated “that the problems, including exploitation in certain franchise systems, are systemic” and their resolution therefore “requires a much broader and more comprehensive approach. As a result, the Committee is “proposing substantial changes to the Franchising Code of Conduct (Franchising Code)” and “to the sections of the Oil Code of Conduct (Oil Code) that relate to franchising, as well as to the responsibilities and powers of the regulator”.
The Report goes on to note that “Prior to this inquiry, the principal regulatory response to issues in the franchising sector has been around improving pre-contractual disclosure. During this inquiry, much was made of: firstly, improving the awareness of prospective franchisees and ensuring that they have access to appropriate legal and business advice prior to entering a contract; and secondly, improving the accuracy and meaningfulness of the information provided to prospective franchisees”.
“The prevailing regulatory response operates on the assumption that if a prospective franchisee is well-informed about the nature of the business and the contractual obligations into which they are entering, the franchisee will be suitably equipped to look after their own interests”, the Report says.
Significant commentary in the report relates to the apparent imbalance of power between the Franchisor and the Franchisee, noting that the past focus on franchisee education and contract transparency does not, of itself, address these issues. “The committee received a raft of evidence about how the abuse of contractual power can manifest in a franchise agreement. Further, the committee also received evidence that pointed to shortcomings in the current regulatory responses such as the duty to act in good faith and the unfair contract terms provisions”, the Report states. “As a consequence, the Committee has recommended sweeping changes to the Franchise Code (and the Oil Code) to address these issues”, said Mark.
It is important to note that the Committee “acknowledges that many franchisors have developed franchise systems that operate to the mutual benefit of the franchisor and their franchisees”.
“Therefore, in developing its recommendations, the committee has been mindful to avoid imposing unnecessary burdens on franchisors who treat franchisees fairly”, the Report states “That said, the recommendations are designed to lift standards and conduct across the entire industry because, on the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees”, the Report says.
In respect of the link between poor franchise arrangements and wage theft, the Committee noted that “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. At times, wage theft was occurring as a way for franchisees to extract profits or service payments in order to stay afloat in a financially constrained business model (given wages are one of the greatest costs in the franchisee's control)”.
So, what does this all mean for the fuel retail industry and the future operation of the Oil Code Regulation in particular? “First and foremost, the report highlights ongoing concern about wage theft within franchise (including CA) networks which means that our industry must continue to focus on eliminating this behaviour within our own industry”, said Mark “In respect of contractual fairness, one of the recommendations of the Committee is that penalties be introduced for civil breaches of both the Oil Code and the Franchise Code and that the quantum of these penalties be substantially increased so as to provide a meaningful deterrent (Recommendation 16.1) ”, said Mark.
A second high-level recommendation (Recommendation 16.3) concerns aligning the Oil Code with the recommended changes in the Franchise Code, which will give effect to key changes in areas such as ongoing disclosure of obligations and current dispute resolution processes. The report also recommends the merging the Office of the Franchising Mediation Advisor with the Office of the Australian Small Business and Family Enterprise Ombudsman (ASFBEO) to create a single body for the resolution of small business and franchising disputes (Recommendation 15.1) - and that existing dispute resolution procedures be enhanced by including the option of binding arbitration of disputes (Recommendation 15.2).
All in all, the recommendations contained in the 370-page report are substantial and will need to be carefully considered in terms of their potential for any unintended consequences”, said Mark.
ACAPMA will now work with all stakeholders to better understand the implications of these recommendations – and any subsequent adoption by the Australian Government – and then provide this information to members as soon as it comes to hand.
A copy of the report can be downloaded via the Australian Government website: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising/Report.