Key Changes to the Franchising Code
The Treasury has published the Competition and Consumer (Industry Codes-Franchising) Regulations 2024, with the changes designed to keep the Franchising Code of Conduct both effective and fit for purpose. This new Franchising Code of Conduct (Code) repeals the existing Franchising Code of Conduct and becomes effective from 1 April 2025. Below is a summary of the key changes and their implications.
Key Changes
Franchisors must give Franchisees a reasonable opportunity to make returns on required investment (Section 44)
One of the most significant changes to the Code is the extension of section 44. This extension requires all franchisors to provide franchisees with “reasonable opportunity” to achieve a return on investment. This requirement exists in the current Code, however, previously only applied to new vehicle dealership agreements.
The Explanatory Statement stated that “reasonable opportunity” will be specific to the terms of the franchise agreement, the costs paid, and the length of the franchise agreement. Additionally, the Explanatory Statement provides that this change is not intended to remove the risks of running a business, but it is instead intended to promote fairness for franchisees in terms of opportunities. A failure to comply with Section 44 may result in a maximum fine of 600 penalty units.
There are concerns that the extension of section 44 of the Code to all franchises will create regulatory uncertainty. Specifically, the following concerns have been raised:
The Franchise Council of Australia notes that there are significant differences between the business models of vehicle dealerships and other franchises. Vehicle dealerships are generally ‘solely focused on profit’ whereas for other franchises, return is not only focused on this, but on aspects such as tax, wages and other benefits.
What would be the minimum profit margin that is required to constitute a ‘return on investment’? Is a return of 10% enough for the Section 44 requirement, or is only 1% sufficient?
Landlords will generally impose an obligation for the franchisees/tenants to meet fit-out requirements. Would this be considered as ‘the requirement by the franchisor’?
Although the Explanatory Statement notes that franchisors are not required to provide a contractual guarantee of profits or business success, the interpretation of this section remains unclear.
Compensation for Early Termination (Section 43)
Another significant change to the Code is the introduction of section 43. This section generally replicates requirements of the current Code, that again had only previously been applied to new vehicle dealership agreements.
Pursuant to this section, if the franchise agreement is terminated before it expires, or it is not renewed, the franchisors must provide compensation to the franchisees. There are three events that can give rise to compensation under section 43(2)(a) including:
if the franchisor withdraws from the Australian market;
rationalises its networks in Australia; or
changes its distribution models in Australia.
What constitutes a ‘rationalising of network’ remains unclear. Further, it is also unclear what changes can be made to the distribution models without resulting in this section being triggered.
What is clear, is that the introduction of section 43 poses significant risks for franchisors. It remains unspecified as to the level of compensation required from franchisors in these cases. Reassessing franchise agreements may be in the best interest of franchisors.
Section 43(4) provides two specific categories of items which the franchisor is required to buy-back or compensate. Essentially, the franchisors need to buy-back:
all the outstanding stock for the franchise; and
all the essential specialty equipment and branded products that was specified by the franchisor and cannot be repurposed for a similar business.
Other Key Changes
Clarifying the purpose of the Code: The new Code will improve industry conduct standards with the purposes of reducing disputes between franchisors and franchisees. This will be achieved by addressing the power imbalance that was previously at play between franchisors and franchisees.
Capturing service and repair work conducted by motor vehicle dealerships: The new Code will include ‘any servicing or repairing of motor vehicles’ to the definition of motor vehicle dealership.
New opt-out provisions: Franchisees will have the ability to opt-out of receiving disclosure documents and the 14-day cooling off period when entering into a franchising agreement.
Termination for serious breach: Where there is a formal finding of misconduct by the franchisee, the franchisor can terminate the franchise agreement by providing 7 days’ notice. In such circumstances there is no need for the franchisor and franchisee to engage in alternative dispute resolution.
Power to publicly name non-complaint franchisors: Franchisors that fail to meaningfully engage in alternative dispute resolution can now be publicly named by the Australian Small Business and Family Enterprise Ombudsman. The purpose of this change is to promote accountability and transparency by franchisors.
Increased penalties for breaches of the Code: The new Code introduces higher penalties for non-compliance. A penalty of 600 units now applicable to all breaches of substantive obligations.
Key Takeaways
Franchisors and franchisees alike should be aware of the changes to the Code coming into effect on 1 April 2025 and how the changes may impact them.
Consequentially, it may be necessary for franchisors to redraft their existing franchise agreements prior the changes coming into effect. Failure to do so may result in penalties for non-compliance under the new Code.
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Tayla Berger
Senior Associate
T 03 5226 8559 | M 0407 825 365
E tberger@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M 0491 307 550
E: jflanagan@ha.legal
Jemimah Fitzgerald
Lawyer
T: 03 5225 5219
E: jfitzgerald@ha.legal
