Franchising Focus

Welcome to our Summer 2017 edition of Franchising Focus.

As we welcome a new year, some of the key issues from 2016 continue to burn strong – most obviously the ongoing issues around franchisee compliance, particularly in relation to workplace relations matters. We expect that this will continue to be an issue of interest this year and consider it highly likely that more franchise networks will find themselves in the spotlight as the year progresses. Accordingly, we continue to reiterate that franchisors should be taking proactive steps to try and ensure that their franchisees are compliant. However, as discussed in our article below, one of the key issues that a number of networks we have been working with have identified is franchisees who are deliberately non-compliant.

In other matters, The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (more commonly known as the unfair contracts terms regime) commenced on 12 November 2016. For those networks that have not yet considered their documentation (which includes not just franchise agreements, but all standard form agreements) for compliance with this regime, we strongly recommend that this is done as a matter of priority. The Australian Competition and Consumer Commission (ACCC) now has the option to take enforcement action under this legislation and we consider that it will only be a matter of time before the ACCC seeks to test its powers under this legislation. 

Finally, the beginning of a new year is often a good time to take stock of the past year and attend to various housekeeping matters. In particular, the beginning of a new year is often a good time to conduct an internal audit to ensure that all documents and manuals are up to date and reflect current practice – for instance, that they have all been updated to comply with the unfair contracts regime. This is certainly something we recommend doing from time to time.

In this edition of Franchising Focus:

• We consider 457 visas. In the first of 3 articles, we provide an overview of the 457 visa regime and considers who has liability for compliance with the sponsorship obligations attaching to such visas;
• HollyAnn Walters-Quan and Allison McLeod consider how the financial services regulatory regime in the Corporations Act 2001 (Cth) may impact your gift voucher program and loyalty schemes; and
• Stephen Giles discusses the idea of compliance bonds, a relatively new form of compliance tool that a number of our clients are considering introducing to their networks.

Best regards,
Allison McLeod (Editor, Franchising Focus)

By Mira Yannicos, Special Counsel
Migration Agent Registration No. 0532134
Accredited Immigration Law Specialist  

A number of recent exposés have generated extensive media attention and public commentary regarding the issue of the franchisor’s role in ensuring compliance with workplace law in franchise networks. However, an equally prevalent issue that has remained largely unaddressed is the franchisor’s obligation (if any) to ensure compliance with Australia’s immigration laws and sponsorship obligations.Of particular relevance in this context is the 457 visa program.

The 457 visa program

In brief, the 457 visa is a temporary visa which seeks to address genuine skills shortages in the Australian labour market. The 457 visa program aims to fill short to medium term position vacancies on a temporary basis when suitably skilled Australian citizens or permanent residents cannot be found. The Migrations Regulations 1994 (Cth) (the Regulations) relevant to 457 visa holders and associated penalties aim to protect the rights of the sponsored workers without displacing employment opportunities for Australian citizens and permanent residents.

Franchisee vs franchisor liability

In most cases, it is the franchisee that is the direct employer of a visa holder, and the ‘standard business sponsor’ under the Migration Act 1958 (Cth) (the Act), and hence subject to the requirements set out in the Regulations. 

Currently, a franchisor (who is not generally the direct employer of a given visa holder) could only be responsible for breaches of the law if they are considered to be ancillary to the contravention. The franchisor must not aid, abet, counsel, procure, induce, conspire or in any way knowingly be party to a contravention of the Act or the Regulations. This section of the Act currently mirrors the accessorial liability provisions of the Fair Work Act 2009 (Cth) (the Fair Work Act).

In addition, the Migration Amendment (Reforms of Employer Sanctions) Act 2013 (Cth) (the Employer Sanctions Act):

• introduced new non-fault civil penalty provisions for employers who employ non-citizens in Australia without a visa or allow such employees to work without a visa or in breach of visa conditions;
• extended the liability to executive officers, partners and members of a committee of management; and
• tightened the existing criminal offences and civil penalty provisions.

This means that executive officers, partners and members of a management committee who are in a position to influence the conduct of the employer in relation to an offence or contravention, and who have failed to take reasonable steps to prevent the contravention, can potentially be liable and prosecuted under these provisions if they knowingly or recklessly allow or continue to allow a non-citizen to work in Australia without a visa or in breach of visa conditions.

Penalties under the Employer Sanctions Act include both civil penalties and fines for both corporations and individuals and criminal sanctions including up to two years imprisonment.

Potential extension of immigration responsibilities for franchisors

Although, in a franchisee/franchisor relationship, the franchisee is generally the direct employer of the 457 visa holder, and therefore subject to the 457 visa sponsorship obligations, there have been comments made by the Fair Work Ombudsman (FWO) that the ambit of franchisor responsibility for workplace non-compliance may be increasing (refer to our Spring 2016 edition).

It is therefore possible (we consider likely) that moves may be made to extend the responsibilities of franchisors to cover immigration matters, in a similar manner to the moves that have been made to extend the responsibility of franchisors in relation to compliance with workplace relations laws.

In any case, franchisors of networks that routinely rely on 457 visas should consider what additional steps they should be taking to ensure that their franchisees are complying with their immigration law requirements and also to ensure that they, as franchisors, are not engaging in any behaviour that may be in breach of the extended liability laws referred to above.

Next Franchising Focus

Part 2 of the 457 visa implications series on the franchise community will focus on the 457 visa sponsorship obligations for the franchise network and suggested strategies for compliance.

Disclaimer

For further details about any of the issues raised in this article, or to discuss any immigration law matters your network may have, please contact Mira Yannicos at Norton Rose Fulbright Australia.

Gift vouchers and loyalty schemes are popular ways for franchise networks to entice new customers and encourage brand loyalty. However, before implementing such a venture, it is important to consider any relevant legal requirements . Usually, such ventures will be considered in the context of the Competition and Consumer Act 2010 (Cth). However, it is also important to consider whether such they will fall within the scope of the financial services regime in the Corporations Act 2001 (Cth) (Corporations Act).

The Corporations Act

Under section 763A of the Corporations Act, a financial product is defined to include “a facility through which, or through the acquisition of which, a person…makes non-cash payments” (being payments otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins).

Based on this definition, products such as gift vouchers may constitute financial products, meaning they will be subject to the financial services regulatory regime set out in the Corporations Act unless an exemption applies. Likewise, some loyalty schemes may also technically fall within the scope of this regime.

If an arrangement falls within the scope of the regime, we recommend trying to ensure that the arrangement is set up in such manner so as to fall within an exemption. Otherwise, a franchisor might be required to obtain a financial services licence and comply with the significant obligations imposed by the financial services regulatory regime – a potentially expensive and timely exercise. 

The Legislative Instrument – the key exemption for gift vouchers and loyalty schemes

The financial services regulatory regime outlined in the Corporations Act is quite broad. In acknowledgment of this, the Australian Securities and Investments Commission (ASIC) released a number of class orders relating to non-cash payment facilities (including loyalty schemes and gift facilities). These orders generally exempted the relevant non-cash payment facilities from the application of some or all of the financial services regulatory regime.

In 2015 the ASIC Corporations (Non-cash Payment Facilities Relief) Instrument 2016/211 (Legislative Instrument¹ was issued to “remake” a number of existing class orders. The Legislative Instrument was made in respect of “non-cash payment facilities” such as gift vouchers and loyalty schemes and, generally, provides relief from complying with certain parts of the Corporations Act in relation to those facilities covered by the Legislative Instrument.

Gift vouchers

Most gift vouchers are likely to come within the ambit of the Legislative Instrument as they would likely fall within the definition of a “gift facility”. “Gift facility” is defined as a non-cash payment facility in relation to which all of a number of requirements apply. Such requirements include that:

1. the amount available on the facility is set when the facility is issued, cannot be increased and cannot be withdrawn as cash;
2. the facility can be used on multiple occasions, is promoted as a gift product and is not a component of another financial product; and
3. where the facility has an expiry date, it is clearly shown.

If a gift voucher (including the terms and conditions of that gift voucher) satisfies each of the conditions set out in the section 5 definition, then it will be considered a “gift facility” for the purposes of the Legislative Instrument and will be eligible for the relief offered by section 10 of the Legislative Instrument. Specifically, section 10 provides relief from complying with certain sections of the Corporations Act, including Part 7.9 which relates to  financial product disclosure and includes other provisions relating to the issue, sale and purchase of financial products.

Given the above, when drafting terms and conditions for a gift voucher program, it is important to consider the Legislative Instrument. In particular, it is worth considering whether the program can (or should be) set up in such a manner so as to fall within the scope of the definition of a “gift facility” so that it will have the benefit of the relief offered by the Legislative Instrument. Gift vouchers that do not fall within the definition of “gift facility” will not qualify for the relief offered by the Legislative Instrument. For example, relief might not apply where:

1. the facility can only be used once;
2. the gift product can be re-loaded;
3. the expiry date is not prominently and clearly disclosed; or
4. the facility is promoted as an award.

Loyalty Schemes

Loyalty Schemes are also covered by the Legislative Instrument. “Loyalty scheme” is defined as a non-cash payment facility in relation to which a number of requirements are all met.² Those requirements include that:

1. the facility is issued as part of a scheme, the dominant purpose of which is to promote the purchase of goods or services from the promoter;
2. the person who holds/uses the facility is granted credits for purchases;
3. the credits can be used to make a payment for goods/services or obtain another benefit; and
4. the facility is not a component of another financial product.

Based on the above definition many standard loyalty schemes used in franchise networks would be loyalty schemes for the purposes of the Legislative Instrument.

Pursuant to the LegislativeInstrument, a loyalty scheme (that falls within the scope of the definition above) is not a financial product for the purposes of Chapter 7 of the Corporations Act (which governs financial services and markets) and does not have to comply with subsection 601ED(5) (relating to registration) of the Corporations Act.³

It is paramount when reviewing the terms of a loyalty scheme that franchisors consider the Legislative Instrument to determine if their loyalty scheme will fall within the scope of the Legislative Instrument.

Other exemptions

The Legislative Instrument does not just cover gift facilities and loyalty schemes. It also addresses a number of other non-cash payment facilities such as non-cash payment facilities used for third party payments and prepaid mobile facilities.⁴

Depending on the type of franchise network, some of these exemptions may be relevant – for instance, the exemption relating to prepaid mobile facilities may be relevant to franchisors in the telecommunications industry. If you do have any programs in place that in way use non-cash payments, it is important that you consider how the Corporations Act may apply to those programs and whether you may be able to rely on any exemptions to obtain relief from complying with the Corporations Act.

Summary

The Legislative Instrument “remakes” a number of existing class orders and is of particular relevance to any franchise network that in any way deals with non-cash payment facilities. If you have a loyalty scheme, gift voucher program or any other arrangements or programs in place that deal with non-cash payments it is crucial to be aware of the Legislative Instrument and the protections it offers. In this regard, we recommend considering the Legislative Instrument before preparing terms and conditions for any such programs.

For further details on the Legislative Instrument, or to discuss whether your non-cash payment arrangements will fall within the scope of the Legislative Instrument, please contact any member of our National Franchise Team.

Let’s call a spade a spade – the biggest challenge many franchise systems are facing is how to achieve enhanced compliance and reduce the risk of substantial brand damage in circumstances where they are concerned franchisees will deliberately circumvent enforcement and compliance initiatives.

Most franchise systems have introduced, or are in the process of introducing, enhanced training, support, extra monitoring and all the sorts of initiatives workplace relations experts and the Fair Work Ombudsman recommend. But franchise CEOs are not yet sleeping easily, as they have observed a problem that is more widespread, and in some cases more culturally ingrained, than most people thought – deliberate franchisee non-compliance. And not in circumstances where the franchisee is struggling to make ends meet, but in circumstances where, to be frank, there is no excuse.

We have developed a concept called a Compliance Bond that some clients may consider introducing. Interestingly this initiative was given implicit endorsement by the Fair Work Ombudsman report into the poultry industry’s Baiada Group. The Australian Financial review article of November 28, 2016 noted that Baiada’s payroll system included a $50,000 bond from contractors.⁵ According to Baiada, “In the event that a contractor does not meet their wage obligations, the bond money is used to ensure workers receive their full entitlements”.⁶ The bond arrangement supplements a compensation fund similar in concept to that established by 7-Eleven for workers impacted by franchisee non-compliance.

Bonds are already used in several areas in franchising, notably in relation to shopping centre leases and some financing arrangements. We think there are circumstances where they could be appropriate in the context of franchisee workplaces, notably:-

• for new franchisees, where the arrangement can be built into the franchise model;
• in the context of transfer of an existing franchised business; and
• for existing franchisees where default has been identified, as a condition of the franchisor agreeing not to terminate the franchise agreement.

There are of course other factors to consider, including whether the introduction of a Compliance Bond is fair in the context of the new legislation that prohibits unfair contract terms in standard form small business contracts, and whether this additional requirement makes the franchise more difficult to afford or finance. Plus, franchisees will ask questions such as who is entitled to any interest earned on the bond, or even seek to register a PPSA interest. Such an arrangement might increase a franchisor’s exposure (legally or morally) if an issue arises but is under-funded or a franchisor pays out on a claim which is challenged. Care needs to be taken in setting up the Compliance Bonds, and drafting the relevant documentation. Franchisors may need to consider establishing a compensation fund alongside the Compliance Bond framework so that the purpose is seen as being consistent with protecting vulnerable workers, not as a penalty arrangement where only the franchisor benefits. But the idea clearly has merit.

The insurance industry agrees. In preliminary discussions with one major insurance organisation the concept of a franchise industry fund has even been discussed, backed by an insurance policy that would mitigate the cash impact.

Watch this space for further developments, but if you think there may be benefits in considering the Compliance Bond concept call any member of our national franchise group.