Whilst Franchisors may require Franchisees to pay marketing or advertising fees pursuant to their Franchise Agreement, Franchisors must comply with strict obligations when collecting those contributions. The Competition and Consumer Industry Codes – (Franchising) Regulation 2014, known as the Franchising Code of Conduct (“Code”), sets out Franchisor’s obligations with respect to operating marketing funds.
Where a Franchisor requires Franchisees to pay advertising or marketing fees, those fees must be kept in a separate bank account known as the Marketing Fund. Where the Franchisor operates their own sites, the Franchisor must also pay the same fees into the Marketing Fund as paid by other Franchisees.
The Marketing Fund must only be used to meet expenses that:
(1) have been disclosed to Franchisees in the Disclosure Document issued under the Code; or
(2) are legitimate marketing or advertising expenses; or
(3) have been agreed to by a majority of Franchisees; or
(4) are the reasonable costs of administering and auditing the Marketing Fund.
By 31 October each year, Franchisors must prepare and have audited a financial statement setting out the Marketing Fund’s income and expenditure for the previous financial year. This statement must contain sufficient detail to give Franchisees meaningful information about the sources of the income received and the items of expenditure.
A copy of the financial statement for the Marketing Fund and a copy of the Auditor’s Report must be provided to Franchisees within thirty (30) days of being prepared. Franchisors will only be exempted from the requirement to audit the Marketing Fund where 75% of Franchisees agree the Marketing fund does not need to be audited.
In 2017 Domino’s Pizza Enterprises Limited were fined the sum of $18,000.00 by the ACCC for breaching their obligations under the Code. The ACCC issued the infringements notices due to Domino’s failure to provide Franchisees with an annual Marketing Fund financial statement and an Auditor’s report within the time limits prescribed under the Code. Whilst Domino’s provided the required financial statement and audit for 2015/2016 financial year to Franchisees, they had done so in February 2017 being outside the time frames set out in the Code.
As such, Franchisors should be aware of the strict obligations and time frames which apply when receiving marketing or advertising fees from Franchisees and operating Marketing Funds.
If you require advice or further information in relation to any of the matters discussed in this article, please contact our Corporate & Commercial team on 03 5273 5263.