The Government passed legislation increasing penalties for breaches of the Code
From 15 April 2022, penalties will change in 3 ways:
- New $133,200 penalties are introduced for some breaches;
- Breaches of 3 important obligations will have a penalty of up to $10m*; and
- Other existing penalties will increase from $66,600 (300 penalty units) to $133,200 (600 penalty units).
Why did they make the changes?
To increase active compliance with the Code. Some large franchisors were not deterred by the lower penalties – they would incorporate the risk of a penalty into their cost of doing business.
What penalties have changed?
| Obligation on franchisor | Clause in Code | |
| New $133,200 penalties | ||
| 1. | To give franchisees a copy of the annual marketing fund statement and audit within 30 days of preparing and receiving it. | 15(4) |
| 2. | To act in good faith. Not to enter into franchise agreements which limit this. | 6(1), (4)-(5) |
| 3. | To give a prospective franchisee the information statement within 7 days of their application or expression of interest. This must be given before any franchise documents.
We suggest reviewing your recruitment process to ensure this is given in time. |
11 |
| 4. | Not to enter into franchise agreements that require franchisees to pay the franchisor’s costs for settling a dispute. | 22 |
| 5. | Not to unreasonably withhold or revoke consent to a transfer. | 25(2), (6) |
| 6. | Not to terminate a franchise agreement:
|
27(4), 28(2) |
| 7. | Not to require franchisees to undertake significant capital expenditure. | 30 |
| Increases to $10m * | ||
| 8. | To disclose any new financial statements/reports to franchisees:
|
17(1) |
| 9. | To disclose any materially relevant fact** in writing to franchisees within 14 days of it happening (if it is not already in the disclosure document). | 17(2) |
| 10. | Not to restrict franchisees from forming an association. | 33 |
| Increases from $66,600 (300 units) to $133,200 (600 units) | ||
| 11. | All other obligations in the Code that already have penalties. | |
Note: We have not included penalties which only relates to new vehicle dealerships.
* The $10m Penalty – Explained
For companies, penalties will be the higher of:
- $10 million;
- 3 times the amount they financially benefited from the breach (if it can be determined); and
- 10% of annual turnover (if the above can’t be determined).
- For individuals, this will be $500,000.
**What is a materially relevant fact about the franchisor?
- a change in ownership;
- any court judgement. This applies to certain proceedings, so please seek advice if relevant;
- if more than 10% of franchisees bring proceedings against them;
- a change in intellectual property; or
- going into liquidation or being wound up.
What do you need to do?
- Review the penalty changes below and understand the increased risk to your business.
- Review your processes for recruitment, annual disclosure document updates and marketing funds to ensure you are compliant.
- Let us know if you need any help!