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Franchising report reveals “deeply rooted cultural problems”

The Australian Senate thinks there needs to be a comprehensive shift in power in the franchising sector.

In a long-awaited report on its inquiry into the sector, released today, the Senate said the current regulatory environment has failed to deter poor conduct and exploitation within the sector and created an imbalance in power.

On that basis, it recommends giving greater protection to franchisees and whistleblowers and applying greater penalties for misconduct. This would involve making several changes to the Franchising and Oil Codes and giving more responsibility and enforcement powers to the ACCC to conduct investigations into misconduct in the sector.

“There are deeply rooted cultural problems that will not be resolved by a franchisor replacing a few senior executives,” the report stated.

The report points out that disclosure has been the principal and almost only protection for franchisees, and that while many franchisors would like to keep it that way, it is no longer sufficient.

“The extent and breadth of misconduct within the franchise sector demonstrates that disclosures and transparency alone, while vitally important, are an insufficient response to power and information asymmetry,” the report said.

The report recommends more protection for franchisees and employees who want to blow the whistle on franchisors engaging in misconduct, and suggests that whistleblower protections should apply in these cases. The inquiry uncovered many instances of franchisors using intimidation to keep franchisees from speaking out.

The report also recommends steeper civil penalties be introduced into the Competition and Consumer Act 2010, and the Franchising Code of Conduct, in order to ensure they act as a “meaningful deterrent” against further misconduct.

The penalty amounts would be similar to those currently found under Australian Consumer Law, and should be prescribed in legislation so that the limit on penalties under industry codes does not apply to franchising.

One of the major issues in the sector presented in the report is wage theft, partly due to the business model franchisors operate under, and partly due to social and cultural problems within the industry.

“At times, wage theft is occurring as a way for franchisees to extract profits or service payments in order to stay afloat in a financially constrained business model (given wages are one of the greatest costs in the franchisee’s control),” the report said.

“Whilst many franchisors cited greed as the primary motivation for wage theft, the committee notes that the issue is far more complex and partly inherent to the business models’ structural breakdown of power and the imposition of cost controls.”

Last week, the Migrant Workers Taskforce recommended criminal penalties be put in place for businesses which intentionally conduct staff underpayment, noting it had found “widespread levels of non-compliance with relevant laws.”

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