New Rules, New Risks: Inside the New Franchising Code Changes

 

KEY INSIGHTS:

• Fairer franchise agreements – From April 2025, franchisors must ensure franchisees have a genuine opportunity to recover their investment, with clearer rules on returns and early termination compensation.
• Stronger protections – New limits on restraint of trade clauses, clearer dispute resolution options, and significantly tougher penalties aim to rebalance the franchisor–franchisee relationship.
• Legal support is key – With more complexity in the updated Code, franchisees are encouraged to seek legal advice to protect their rights and fully understand agreement terms.

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Franchising is a popular business model in Australia, seen across industries like food, automotive, and fitness. While it offers growth opportunities, it often highlights the power imbalance between franchisors (brand owners) and franchisees (business operators)

To address this, the Franchising Code of Conduct was introduced and has now been updated, with key changes taking effect from 1 April 2025 to provide greater protection and fairer treatment for franchisees.

 

Why Were the Changes Needed?

The reforms stem from a 2019 Parliamentary Inquiry, which exposed serious issues such as unfair contracts and financial risks faced by franchisees. The inquiry pushed for stronger rules to balance rights, improve dispute handling, and ensure franchisors meet higher standards of fairness.

 

Key Changes for Franchisees

1. Earning a Fair Return

1. One of the key updates to the Franchising Code is that Franchisors must now structure agreements, so franchisees have a reasonable opportunity to recover the money they invest.
2. Previously, this rule mainly applied to new car dealerships – it now covers all franchises.
3. This change responds to concerns raised in the 2019 inquiry, where many franchisees:
   1. Faced very high setup costs (fit-outs, equipment, etc.).
   2. They had little control over major expenses (like suppliers and marketing fees).
   3. Had slim chances of earning back their upfront investment, even when following the franchisor’s system exactly.
4. While the update doesn’t guarantee profit, franchisors must now show that franchisees have a genuine chance of making a return based on clear and fair financial information.

 

2. Compensation to Early Termination

1. If a franchisor shuts stores, changes their business model, or leaves the Australian market, franchisees might be able to claim compensation – especially if they’re stuck with unused stock or equipment.
2. Grey Areas:

1. 1. The Code doesn’t clearly explain what counts as “rationalization” or “change in distribution,” which could cause confusion.
   2. Disputes may arise if it is unclear whether compensation applies.

 

3. Tips for Franchisees

1. Make sure your agreement clearly lists any stock or equipment you hold.
2. Ask about the franchisor’s long-term plans before signing.
3. Get Legal Advice to ensure you are properly covered under the new Code.

 

 

Limits on Restraint of Trade Clauses

The new Code puts tighter limits on when franchisors can stop franchisees from opening or working in a competing business after their franchise agreement ends.

• Key Points:

  • Franchisors can’t enforce a restraint if they refuse to renew the franchisee’s agreement.
  • They also can’t enforce it if the franchise agreement included a renewal option, but the franchisor chose not to offer renewal.

 

Alternative Dispute Resolution Process

The updated Code continues to encourage franchisors and franchisees to settle disputes through mediation, conciliation, or arbitration, which aims to save time and legal costs.

In some cases, franchisors can bypass mediation altogether. If they can prove serious misconduct by the franchisee, they are allowed to end the agreement with just seven days’ notice. The Code itself doesn’t clearly define what qualifies as serious misconduct – this will be left to courts, regulators, and the wording in each individual agreement.

Franchisees should review their agreements carefully to understand how misconduct is described and what protections they have.

 

Tougher Penalties for Breaches

The 2019 franchising inquiry revealed that penalties for franchisors who broke the rules were too low to act as a real deterrent, especially for bigger companies. Some franchisors simply treated non-compliance as part of doing business.

Under the new Code, civil penalties have been significantly increased (almost double for some breaches. The aim is to:

1. Make non-compliance a serious financial risk
2. Encourage franchisors to follow the rules rather than ignore them.
3. Be a message for franchisors that misconduct will not be tolerated.

 

HOW CAN WE HELP?

The updated Code brings more protection, but also more complexity. We can assist you by:

• Reviewing agreements before you sign to check if you have a fair chance to succeed.
• Clarifying your rights to compensation if the franchisor restructures.
• Helping you understand how restraint clauses affect your future options.
• Advising you on the new dispute resolution process if issues come up.