Small Franchises to Bear Biggest Burden of Proposed Regulatory Changes

Much of the current media and government focus on Australian franchising assumes that the sector is dominated by massive multi-national and large national franchise operations.

In reality, the opposite is true. Australia’s franchise sector is overwhelmingly made up of smaller franchises and it is these businesses that will feel the biggest impact of the proposed joint liability legislative changes being considered by the Australian Federal Government.

According to the Franchising Australia 2016 report, of the 1,120 franchise brands operating in Australia, 90% originated in Australia and 66% are classified as small and medium businesses (having less than 50 franchise units).

Small franchise systems (those holding up to 20 franchise units) are the largest component of the Australian franchise sector at 41%, with medium franchise systems (those holding 21 to 50 franchise units) representing a further 25%. Large franchises (those with more than 50 franchise units) account for only 34% of the Australian franchise sector.

The impetus for the proposed Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 that is currently being debated by the Australian Parliament stemmed from the wrongful workplace practices of franchisees of predominantly large international and national franchise networks.

As a result, the Australian franchise sector as a whole – which is overwhelmingly the domain of local small businesses – could now face an increased regulatory burden imposing joint liability on franchisors for the actions of their franchisees.

Small franchises are the backbone of the Australian franchise sector and make the biggest contribution to its $146 billion annual sales turnover and employment of 470,000 people nationally.

But it is these businesses that will be hardest hit by the proposed joint liability legislative changes and are the least equipped to deal with the increased regulatory, resourcing and financial burden that comes with it.

We have previously highlighted how the Australian Government’s plan to combat recent cases of franchise misbehaviour by holding franchisors jointly responsible for the workplace practices of their franchisees could undermine the entire business model of franchising in this country.

These concerns have since been reinforced by the US based International Franchise Association (IFA), which has warned the proposed laws could cripple the Australian franchise sector and lead to fewer jobs and slower economic growth.

The IFA describes Australia as one of the world’s most franchised economies and the proposed regulatory changes as threatening the franchising model as we know it.

It says a similar attempt to introduce joint franchise liability in the United States is in the process of being overturned, as it was deemed widely unsuccessful and severely impacted on the way franchisors serviced and resourced their franchisees.

This is the big danger that the proposed legislation poses to the Australian franchise sector.

If the franchisor is forced to share statutory responsibilities with non-complying franchisees, any costs associated in mitigating this responsibility will be passed on to the entire franchise network in the form of increased fees or the cut-back of other support services.

Small franchise systems, the single biggest driver of Australia’s franchise sector, would be most at risk due to their limited funds and resources.

It is the separation between franchisor and franchisee that is the essential element in the franchise business model. Both parties operate as separate legal entities, enjoying the separation of ownership and custodianship while agreeing to share benefits.

Joint responsibility under law could potentially burden the operating costs of franchise systems, thereby affecting their economic value, the resources they can provide to franchisees and the growth prospects of the Australian franchise sector as a whole.

The media and public spotlight on franchising and the proposed new legislative requirements appears to be too heavily focused on the big global franchise brands and how they have the size and capabilities to absorb additional regulatory burdens that come their way.

However, it is worth remembering that franchising in Australia is not just about the mega global corporations. The majority of the sector comprises small to medium sized businesses.

What is overlooked in much of the current debate is that it is these businesses that will bear the real brunt of the proposed legislative changes through increased risks, operating and monitoring costs, and resource and compliance demands. This could significantly damage the entire franchise sector and in turn the important contribution to the overall Australian economy.

Prof Lorelle Frazer

Professor and Director, Asia-Pacific Centre for Franchising Excellence

She is Australia’s, and one of the world's leading franchise researchers, having been actively involved in franchising research and Australian franchise sectoral policy initiatives for more than a decade. Her research stretches across the range of challenges faced by the sector, and is often quoted by government and used to drive positive policy reform.

Lorelle was the first person in Australia to complete a PhD in franchising, and uses her franchise research expertise to mentor franchising PhD candidates, further enhancing understanding of issues faced by the sector.

Lorelle has received multiple awards and recognition for her high standard of teaching and quality assurance methods for student learning outcomes and in 2010 was awarded the Franchise Council of Australia's National Contribution to Franchising Award.