2025 Franchising Code of Conduct Changes
Following an independent review in 2024, the Franchising Code of Conduct will be updated on 1 April 2025 with substantial changes. The purpose of these updates is to improve the standards of conduct and best practice by increasing transparency and reducing disputes and to provide fair dispute resolution procedures. In this article, we provide an overview of the key modifications to the Code of Conduct and their implications.
Streamlined Disclosure Process
The key facts sheet will be discontinued and the information it contains will be integrated into the disclosure document to reduce paperwork. This will reduce administrative burdens and enhance clarity for prospective franchisees.
Existing franchisees entering into new franchise agreements for substantially the same franchise can opt out of receiving the disclosure documents and the 14-day cooling-off period, under certain conditions.
Strengthened Termination and Compensation Rules
The new Code will introduce stricter regulations regarding the termination of franchise agreements. Franchisors can terminate agreements with seven days’ notice under specific circumstances such as serious breaches of the Fair Work Act, criminal convictions or insolvency.
If a franchise agreement is terminated early due to the actions of the franchisor, franchisors will be obligated to compensate the franchisee. The Code will require franchisors to specify how such compensation will be calculated.
Section 43(3) provides two categories of items which the franchisor will be required to compensate or buy back. The Franchisor will need to buy back all outstanding stock for and all essential speciality equipment and branded products and cannot be repurposed for a similar business. It is unclear how the value for the outstanding stock and equipment will be determined.
Increased Penalties
A penalty of 600 units will apply to all breaches of substantive obligations. The current rate of $330 per unit equates to $198,000 per breach. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will have the authority to publicly name franchisors that do not engage meaningfully in alternative dispute resolution processes. This is intended to promote accountability and transparency.
Specific Purpose Funds
The new code will replace terms such as “marketing funds” and “cooperative funds” with the newly defined term “specific purpose funds”. These funds which are controlled by the franchisor, will be subject to more stringent auditing and reporting requirements.
Reasonable Opportunity for Investment
One of the most significant changes to the Code is the extension of section 44. It will require that all franchise agreements provide franchisees with a reasonable opportunity to achieve a return on the investment. Previously this requirement had only applied to new vehicle dealership agreements.
The Explanatory Statement provides that this is not intended to remove the inherent risks of running a business. But it is intended promote fair opportunities for franchisees.
There is inherent uncertainty about the ROI requirement; that this extension to all franchises will create regulatory uncertainty:
The extension without any modification ignores the differences in business models between vehicle dealerships and other franchises. The Franchise Council of Australia (FCA) pointed out that vehicle dealerships are ‘solely focused on profit’ whereas return for franchises in the broader sector is a combination of wages, tax and other benefits.
Almost all investments by a franchisee are ‘required by the franchisor’ in a typical franchise agreement. For example, landlords will generally impose an obligation for the franchisees/tenants to meet the fit-out requirements. Is this considered as part of the ‘required investment by the franchisor’?
What is the minimum profit margin required to constitute an ‘return on investment’? Is a return of 1% on investment enough to satisfy the section 44 requirement?
Although the Explanatory Statement has noted that that franchisors are not required to provide contractual guarantee of profits or business success, it remains to be seen how this section will be interpreted.
In the meantime, we recommend taking a conservative approach and are ready to discuss with you how the requirement of reasonable return on investment may impact on your specific franchise system.
Application and Transitional Provisions
The new Code will apply to all franchise agreements which are entered into, transferred, renewed or extended on or after 1 April 2025. However, certain provisions will have a delayed implementation until 1 November 2025 to allow franchisors to have additional time to adjust to the Code updates.
These provisions include section 43 relating to compensation for early termination, section 44 relating to reasonable opportunity for return on investment and sections 31 and 61 relating to specific purpose funds.
We invite all our franchisor clients to make a time with us to discuss the new Code changes and create a strategy of adapting your franchise documents throughout the year in addressing the new Code.
