I’m a Franchisee. What are my Ongoing Obligations?
I’m a Franchisee. What are my Ongoing Obligations?
Running a franchised business offers many advantages over other types of businesses. A franchisee has access to not only ongoing support and training, but also predetermined systems and processes to help sell the franchise network’s products and services. As a highly regulated area of the law, franchisees must adhere to strict legal obligations. This article sets out the key ongoing obligations as a franchisee.
Your franchise agreement is a specific contract formalising your relationship with your franchisor. Along with the Franchising Code of Conduct (the Code) and related documents (such as a lease/licence agreement and an Operations Manual), your franchise agreement is a fundamental source of your roles and responsibilities and those of your franchisor. You should therefore have a good understanding of your written agreement. Your franchise agreement typically includes exhaustive lists of what your franchisor expects of you.
For example, it may include information on:
• the range of products and services you must offer to customers;
• maintaining any equipment and premises;
• ordering supplies;
• what fees you are required to pay to the franchisor (including interest for late payments);
• activities for which you have to obtain the franchisor’s prior written consent;
• ongoing reporting (e.g. sales and customer complaints); and
• notices to provide to the franchisor if specific events occur (e.g. a change in shareholders of the franchisee company).
If you are concerned that you may have potentially violated a part of your franchise agreement, you should obtain expert legal advice immediately – don’t wait until you receive a breach notice. By being proactive, you can try and mitigate the issue and remedy the breach before your franchisor formally escalates the issue.
Most franchisors have an operations manual – a document detailing the standards and procedures that apply to all businesses within a particular franchise network. A franchise agreement may contain a clause saying that it is compulsory for franchisees to follow the manual. In such circumstance, the manual becomes a binding contract between the franchisor and yourself, as the franchisee. Further, it may state that failure to comply with the manual constitutes an infringement of the contract. If your franchise agreement contains such a clause, take the time to review each chapter of the manual and understand exactly what the franchisor expects of you.
An operations manual may include:
• requirements around software;
• upselling products and services;
• advertising strategies; and
• which suppliers you can use to purchase products.
If you do not understand a particular procedure that you are expected to follow, clarify such with your franchisor as soon as possible. Doing so shows that you are still taking reasonable steps attempting to meet your obligations.
If you entered into your franchise agreement or your contract was varied or transferred (e.g. to a different franchisee entity) after 1 January 2015, you must act in good faith in all dealings with your franchisor. The good faith obligation is set out in the Code and applies equally to your franchisor. Even if you purchased your franchise before 2015, courts in Australia found that there can still be an implied responsibility to act in good faith. Such obligation is known as a common law obligation. It refers to a requirement developed through court decisions. Contrastingly, the obligation under the Code is known as a statutory rule.
The statutory obligation to act in good faith applies equally to people negotiating the purchase of a franchise business and franchisees who have already signed a legally binding contract.
For example, acting in good faith encompasses:
• being honest;
• co-operating with the franchisor;
• taking into account the franchisor’s commercial interests; and
• acting in accordance with your legitimate business needs (rather than a hidden, non-commercial agenda).
Acting contrary to your obligation of good faith may, for example, include:
• arbitrarily issuing breach notices;
• trying to terminate your contract using baseless allegations;
• aggressively pressuring the franchisor; or
• refusing to engage properly in the dispute resolution process.
Laws for Australian franchises
Apart from your contract and franchise-specific laws, you also need to comply with any other regulations that may apply to your particular franchised business, such as the following.
If you hire staff to work in your franchise, it is essential to adhere to the Fair Work Act 2009 (Cth) and other employment laws especially when hiring and paying employees and dealing with disputes. It’s important to ensure all of your employees have an employment agreement governing your relationship with them. The agreement should contain critical matters like salary, leave, entitlements and ways to resolve a dispute if one arises.
Workplace health and safety laws
Workplace health and safety (WH&S) laws require you to:
• provide a healthy and safe working environment for your employees, contractors and visitors to your workplace;
• proactively protect them from injury and illness; and
• promote their welfare.
To implement such laws, you must have a WH&S policy outlining your procedures and expectations for your employees to also comply with the law.
Food safety laws
If your franchise sells or handles food, food safety laws like the Food Standards Australia New Zealand Act 1991 regulate how you can manage and sell your food products. They include standards you must meet to ensure your food is of high quality and suitable for human consumption.
Depending on what product or service your franchise provides, you should ensure you comply with any required licensing laws. For example, if you sell alcohol, you must hold a valid liquor licence. Further, employees handling the alcohol must have an additional responsible service of alcohol qualification.
• what information your franchise collects;
• whether your franchise exchanges information with third parties;
• how an individual can correct their information and complain about a breach;
• Your process for dealing with complaints about privacy.
It is important to consider other general obligations that apply to any small business – such as taxation. It is always a good idea to get business and accounting advice to complement legal advice. Doing so assists in ensuring compliance with your responsibilities throughout the term of your franchise.
If you believe your franchisor is not compliant with its responsibilities, and you want to start a formal dispute, you must issue a written notice in a particular format. In the notice, you have to set out:
• exactly what the dispute is,
• your desired resolution,
• what you want your franchisor to do, and
• how long they have to take these steps.
If you are unable to resolve the dispute internally and within three weeks, you can mediate the dispute in accordance with the Code. Attendance at mediation is compulsory for both yourself and the franchisor. However, compulsory mediation doesn’t prevent either party from starting proceedings in a court.
Being aware of and complying with your ongoing obligations as a franchisee is important – if you violate a rule under the Code, the franchise agreement, or your operations manual, your franchisor can issue you with a breach notice. If you ignore that breach notice and do not attempt to remedy such, your franchisor can rely on this notice as a basis to terminate your franchise. To ensure that you comply with your ongoing obligations as a franchisee, get in touch with one of LegalVision’s franchising lawyers.
Amritha Thiyagarajan is a Senior Lawyer at LegalVision, working with franchisees and franchisors across a variety of industries. She has worked previously as a litigation lawyer at a top-tier international law firm.
LegalVision is a market disruptor in the commercial legal services industry. Their innovative business model and custombuilt technology assist their lawyers to provide a faster, better quality and more cost-effective client experience. LegalVision is a leader in delivering legal services in Australia and has assisted more than 50,000 businesses. The firm was awarded NewLaw Firm of the Year at the 2017 Australian Law Awards and was named 2018 Fastest Growing Law Firm in APAC by the Financial Times.
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