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Franchising is a way for business owners to expand and grow their business across Australia and the world. As a franchisor, you give third parties (franchisees) the right to use your IP and systems to offer, sell or distribute goods or services. The franchisee pays fees to the franchisor in exchange for these rights. This article will assist franchisors in understanding what their obligations are and what compliance with the relevant laws looks like in Australia.

A Snapshot of Franchising in Australia

Operating a franchise network in Australia involves more than just getting the franchise documentation right. The franchisor’s role is to support the franchise network on an ongoing basis by providing training, guidance, resources and assistance to franchisees as they use the franchisor’s systems and IP. As part of their ongoing obligations, franchisors should also ensure:

  • their franchise networks are compliant with Australian laws;
  • their franchisees are recruited and onboarded correctly; and
  • that franchisees feel supported and are assisted throughout the franchise term.

In Australia, most of these franchisor obligations are governed by the Franchising Code of Conduct (the Code). However, franchisors should also be aware of the other laws and regulations which often apply to franchise and business relationships.

Additionally, franchisors should take the time to understand what compliance with these laws means for their business and the potential consequences of non-compliance. Franchising is a hugely successful way to expand your business in Australia. However, ultimately, it is a lot of responsibility.

The Franchising Code of Conduct (the Code) 

The Code is a mandatory code that applies to all franchise agreements in Australia. It is the law and is binding on both franchisors and franchisees.

The Code was introduced in 2015 to regulate the conduct of franchisors and franchisees throughout their relationship. Amongst other things, the Code:

  • defines what a franchise agreement is;
  • requires all franchise parties to act in ‘good faith’ towards one another;
  • requires franchisors to disclose specific information to franchisees prior to and during the franchise relationship;
  • details the rights and obligations of franchisors and franchisees under the franchise; and
  • provides mechanisms for the resolving of disputes between the franchise parties.

What Does the Code Require of Franchisors?

The obligations of franchisors under the Code can be broken down into two main categories.

1. Conduct Prior to Granting a Franchise

The Code provides that franchisors must disclose certain information and provide documentation to prospective franchisees prior to entry into a franchise agreement and on renewal and transfer of a franchise agreement. The documents they need to provide are the:

  • disclosure document;
  • franchise agreement;
  • information statement;
  • key facts sheet; and
  • lease documentation (if applicable).

Franchisors must not sign the above franchise documentation until the franchisee has had the documents for at least 14 days. Additionally, franchisees will have a right to terminate the franchise agreement within 14 days of signing it, as provided in the Code. In these circumstances, franchisors are required to refund all fees paid, less their reasonable expenses.

2. Conduct During the Operation of a Franchise

Once you are a franchisor, you must continue to comply with the Code. These obligations include:

  • updating your disclosure document yearly;
  • providing a copy of your disclosure document if requested by a current franchisee;
  • providing yearly financial reports in relation to the franchisor’s financial position, solvency and the operation of the marketing fund (if applicable);
  • ensuring that disputes are resolved under the Code processes;
  • following certain procedures at the end of the franchise agreement, including termination rights, transfer or extension of the franchise agreement by the franchisee and how restraints will operate.

Other Applicable Laws

As a franchisor, there are other laws beyond the Code that you should be aware of as you expand your business.

Employment Law

A franchisor should not disregard their responsibility to a franchisee’s employees. Recent cases have shown that in running a franchise network, it is important franchisors have a business model in place which will facilitate the success of franchisees and their employees.

For example, some ways you can do this is by:

  • providing training on complying with employment law;
  • introducing employment law compliance checks;
  • providing or reviewing employee contracts; and
  • including pricing models that will encourage a franchisee to comply with employee wage requirements.

Australian Consumer Law (ACL)

The ACL is a national law that protects consumers. Additionally, the Australian Competition and Consumer Commission (ACCC) and relevant state and territory consumer protection agencies jointly monitor and administer compliance with the ACL.

When franchisees are providing goods or services to consumers, the terms of the ACL will apply. Similarly, when franchisors provide goods or services to franchisees, most of these supply arrangements likely fall under the ACL. 

This means that monitoring compliance with the ACL works in two ways. Franchisors should ensure:

  1. they are complying with the ACL in the supply of goods or services to franchisees (including in the terms of the franchise agreement); and
  2. their franchisees comply with the ACL while supplying goods or services to customers.

Further, to ensure compliance on a franchisee level, franchisors should have:

  • a complaint handling procedure within their manuals, including a policy on meeting the consumer guarantees provided under the ACL; and
  • any customer-facing contracts drafted by a lawyer before providing them to franchisees for use. 

On a franchisor level, franchisors should regularly review their supply chain with their lawyers and discuss any risks that might arise in the provision of goods, services or franchises to franchisees.

Leasing

Where your franchisees operate from leased premises, the franchisor should ensure the franchise documentation covers the occupancy rights for the premises. Additionally, they will need to ensure that the landlord provides a lease.

Moreover, there are different obligations, risks and documentation associated with how a premises is leased, which depend on:

  • who will be the tenant under the lease;
  • the type of premises being lease; and
  • the type of service being provided from the premises.

For example, whether a leased premises will be considered a ‘retail lease’ will depend on the relevant state in which the premises is located. It will also depend on the subsequent state or territory laws that are applicable.

Therefore, franchisors should seek leasing advice from their lawyer on the risks and structure of any occupancy rights needed within their franchise network and the applicable laws which may apply.

Privacy Law

Franchisors and franchisees will likely be subject to the Privacy Principles set out in the Privacy Act 1988 (Cth). For instance, these laws restrict the ways in which franchisors and their franchisees can deal with and distribute certain information. Therefore, with most customer data sent and received in a franchise network through the internet or cloud-based software, franchisors must carefully monitor compliance with Australian privacy laws.

For example, some ways of doing this include:

  • having a privacy policy drafted by a lawyer;
  • ensuring your privacy policy is provided to all franchisees in the operations manual and circulated when it is updated;
  • reviewing all websites operated by the franchisor or franchise network and ensuring the privacy policy is present on these sites;
  • reviewing your databases to ensure they comply with privacy laws, particularly if the information contains personal details or allows for the tracking of certain groups of people; and
  • ensuring all marketing material complies with privacy laws. For example, you cannot send unsolicited emails from data collected without the consent of customers.

Intellectual Property (IP)

IP describes the various kinds of intangible assets owned by franchisors and used by their franchisees across their network. IP often includes:

  • trade marks;
  • copyrights;
  • patents;
  • designs; and
  • trade secrets.

Franchisors should always be thinking about how their IP is protected while franchisees are provided with the right to use it.

Some things franchisors should introduce into their network to better protect their IP when franchising in Australia include:

  • providing guidance for franchisees on how they must protect and enforce the IP (e.g. explaining what trade mark infringement involves).
  • ensuring all prospective franchisees sign a non-disclosure agreement before receiving franchise documentation;
  • ensuring all franchisees, their managers and staff sign confidentiality agreements or have employment agreements which include confidentiality obligations; and
  • introducing quality control standards and compliance checks on franchisees to ensure they are using your IP correctly.

Key Takeaways

Franchisors have a lot to or obligations when operating a franchise network in Australia. The Franchising Code of Conduct governs most of these obligations. However, franchisors must be aware of the other laws and regulations that often apply to them when franchising in Australia. If you need advice regarding your franchise network, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What are the obligations of franchisors under the Code?

The obligations can be broken down into two main categories; conduct prior to granting a franchise and conduct during the operation of the franchise. See the relevant sections above for a detailed description.

What are the other laws to be aware of as a franchisor?

Apart from the Code, there are some other important laws for Australian franchises to be aware of, including employment law, the Australian consumer law, leasing laws, privacy law and intellectual property.

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