Queensland Business Law Today

I am often asked of the distinction between a “Franchise Agreement” and a “Licence Agreement”.

What is a Franchise Agreement?

The key distinction can be found in the definition of “Franchise Agreement” in the Franchising Code of Conduct (“the Code”). It states that an Agreement will be a “Franchise Agreement” if all of the following criteria are satisfied:

1. The Agreement takes a form that is in whole or part written, oral or implied;
2. The Agreement grants to a person the right to carry on the business of offering, supplying, or distributing goods or services in Australia under a system or marketing plan that is substantially determined, controlled or suggested by the granting party;
3. The business is to be substantially or materially associated with a Trademark, advertising or a commercial symbol owned, used, licensed or specified by the granting party; and
4. Before starting or continuing the Business, the grantee party is required to pay or agrees to pay to the grantor party, a fee in their conduct of the Business.

But what if I call it a Licence Agreement?

It has been well established by case law that simply because an agreement calls itself a “Licence Agreement” does not mean it is not a Franchise Agreement. If a licence agreement meets the definition provided in the Code, it will be deemed a Franchise Agreement and must comply with the provisions of the Code.

Quite often both licence agreements and franchise agreements will satisfy points 1, 3, and 4 above. The key consideration as to whether the agreement does in fact constitute a franchise agreement will come down to a Court’s interpretation of a ‘system or marketing plan’ that is substantially determined, controlled or suggested by the granting party.

What is a ‘System or Marketing Plan’?

The Code has no definition for a ‘system or marketing plan’ and does not explicitly state when it is necessary to consider if such a system or plan is present. The case of ACCC v Kyloe Pty Ltd [2007] FCA 1522 provided a useful list of relevant factors to these issues. They include:

1. Detailed compensation and bonus structures for selling products.
2. Centralised bookkeeping and record-keeping computer operations.
3. Assistance conducting ‘opportunity’ meetings.
4. Comprehensive advertising and promotional programs.
5. Schemes for appointment of distributors, direct distributors, district directors, regional directors or zone directors.
6. Rights to screen and approve promotional materials.
7. Prohibitions on repackaging of products.
8. Suggestions for retail prices charged for products.
9. Division of states into marketing areas.
10. Establishment of sales quotas.
11. Rights to approve sales personnel employed by the sub-distributor.
12. Mandatory sales training regimes.
13. Provision of quotation sheets to the sub-distributor’s employees or prescribed invoices and other sales forms.
14. Requirement that the sub-distributor gather information from customers for the head distributor.
15. Restrictions on sub-distributor selling products without consulting the head distributor.

If any of the above criteria are met, the agreement could be determined to be a franchise agreement, irrespective as to whether the parties intended it to be so. It is for this reason that you should obtain accurate and timely legal advice from a specialist in this complex area of law before entering into an agreement of this nature.

Please contact me should you have any questions or queries in relation to the above.

I recently read an article which highlighted the potential benefits for clients using their Self Managed Superannuation Fund (SMSF) to fund their buy/sell agreement (also commonly referred to as a Business Will).

The concept is simple.  Instead of each business owner effecting an insurance policy on their own life, for a Business Will the policies are owned by the trustees of the superannuation fund.  However whilst the concept is simple, there are a number of pros and cons of SMSF-owned insurance funding (which need to be considered on case by case basis) before proceeding down this path.

This article highlights the advantages and disadvantages as listed below:

Advantages

• A tax deduction for the super contribution;
• Tax-free benefits flowing in lump sum or pension form to death benefit dependants;
• The SMSF obtains a tax deduction for the payment of death and disability insurance premiums;
• Personal cash-flow benefits;
• ATO verification that the super buy/sell agreement complies with the sole purpose test;
• SMSF tax-planning opportunities through anti-detriment and future payment provisions;
• The ability to utilise binding nominations in favour of the estate or dependants.

Disadvantages

• Should the trustee favour non-death benefit dependants, tax is payable;
• A superannuation income stream benefit generally cannot be paid on death to adult children;
• The insurance levels not keeping pace with the value of the business could make the agreement ineffective, unless alternative arrangements are in place;
• Non-death triggers (eg, TPD or Trauma) may not be suitable for superannuation ownership due to potential access restrictions and tax on benefits.”

Issues

From a legal perspective, the main issue I see is the need for regular review of the Business Will.  This requires an ongoing commitment from each business owner to regularly review  the Business Will and update it, if required.

There is also the fact that the value of the business could change over time and create a shortfall in the insurance levels.  This would require careful consideration by the business owners on what is to happen and how and when any shortfall is to be paid.

It is important that the SMSF deed is thoroughly reviewed and appropriate measures are in place to cover non-death trigger events such as trauma and TPD.

These issues need to be carefully considered and compared with the obvious tax advantages.  It is also critical for all clients to obtain the professional advice of a qualified accountant before implementing any insurance policies owned by their SMSF.

If you are considering structuring your Business Will through your SMSF, it is important to obtain the correct legal advice.  Please do not hesitate to contact me if you would like to discuss this further.

Three franchisees of the fast-food chain Pie Face have threatened to launch legal action against the franchisor on grounds of being misled over costs and profits when they first purchased their respective franchises.

The franchisees claim their trading figures during the first seven months of trading were totally different to those initially projected by the franchisor in selling the franchise to them, and that the franchisor had no grounds on which to have based their initial projections.

The franchisor is however standing firm and attributing the franchisee’s difficulty to tough retail conditions and denies providing any misleading or inaccurate cost information. Its CEO Wanye Homschek told SmartCompany “All I can say is that we’re in the business of franchising, and not everyone is going to be a good franchisee”.

Lessons to Learn

The accusation of the franchisees is not new to franchising and shows two things are imperative in the industry:

1. Franchisor’s must take steps to ensure representations made to prospective franchisees are accurate and can be readily verified; and
2. Prospective franchisees need to ensure they conduct a thorough due diligence of the franchise before purchasing a franchised business, and retain professionals to assist them where appropriate.

Franchise disputes are both costly and time consuming. It is therefore essential that both franchisees and franchisors seek the advice of legal professionals who specialise in this area to minimise the risk of disputes arising in the future.

Please contact me should you have any questions or queries in relation to the above.

Franchised businesses differ from other businesses in a number of ways. They offer the ability to run your business using the franchisor’s “system” in a way that allows you to gain benefit from the name, marks, brand, image, and general “know-how” of a well established and generally more expansive organisation.

Whilst operating a franchised business provides you with a great number of benefits, there are also a number of pitfalls that you need to look out for when entering into a franchise agreement.

The Franchising Code

Franchising in Australia is governed by the provisions of the Franchising Code of Conduct (“the Code”) which regulates the conduct of both franchisors and franchisees. It also provides penalties for non-compliance.

What Documents Should I Receive as a Franchisee?

The Code requires that at least 14 days before you enter into the franchise agreement or make a non-refundable payment to the franchisor, the franchisor must provide you with a copy of the following documents:

1. A copy of the Code;
2. A copy of the franchisor’s “Disclosure Document”; and
3. A copy of the franchise agreement.

Disclosure Document

The Disclosure Document is designed to provide you with information about the franchise so that you can make an informed decision as to whether or not you wish to enter into a franchise agreement with the franchisor.

Although it is important that you consider all of the information contained within a Disclosure Document, I generally advise my clients to pay attention to the following:

1. The experience of the franchisor, including the experience of its directors and key personnel;
2. Whether the franchisor has been involved in previous litigation or other Court proceedings;
3. The details of other current franchisees and their respective locations;
4. The number of franchisees that have exited the system during the past three financial years;
5. The fees payable by you during the franchise term, including any additional costs and expenses that may be passed on to you by the franchisor; and
6. The franchisor’s financial reports and accounts for the past three financial years.

Franchise Agreement

Your franchise agreement is just like any other contract and as such it is imperative that you read it and fully understand it before signing it. You should pay particular attention to the following:

1. Whether or not your site and/or territory are exclusive to you and whether or not the Franchisor can grant additional franchises within your area, or even operate their own business in competition with you.
2. The extent of the fees, levies, and/or other expenses that you are required to pay under the franchise system.
3. The exact nature of the rights that you are granted under the franchise system and the restrictions on your use of the franchisor’s brand.
4. Whether or not the lease of your business premises is to be held in your name or in the name of the franchisor.
5. Whether or not you are required to undertake a fit-out or refurbishment of the business premises during the franchise term.
6. The extent of the training/assistance that will be provided to you by the franchisor at the beginning of, and throughout, the franchise term.
7. The process that is involved should you wish to sell your franchised business at some stage in the future.

Entering into a franchise agreement is a significant undertaking. It is essential that anyone considering entering into a franchise agreement seeks legal advice before doing so. Please contact me if you have any questions in this regard.

A Shareholder’s Agreement is something that I strongly encourage all my clients who operate a business (either as a partnership or company) to have.  When I first see a client about starting a new business, they are often full of enthusiasm and great intentions however, have not given much thought about what could go wrong.

The breakdown of a business relationship is a very stressful time for owners and by simply having a Shareholder’s Agreement in place, you could save a lot of money on legal costs and stress and avoid Court.

What does the Shareholder’s Agreement cover?

The primary aim of the Shareholder’s Agreement is to resolve any potential issues that will arise in the operation of the business. It will also typically include:

1. What happens on the death or total permanent disablement of an owner;
2. Conflict of interest;
3. Retirement;
4. Contribution of capital;
5. Composition of the board;
6. Decision making process and resolutions that require a majority or unanimous consent;
7. The roles of the directors;
8. The contribution of capital into the business as and when needed;
9. Ownership of intellectual property;
10. Profit distribution policies;
11. Restraints of trade; and
12. Dispute resolution.

The Shareholder’s Agreement, as opposed to your company’s constitution, is more specialised and tailored to your company’s particular purpose, the nature of its business and the aims and wishes of its shareholder’s.

Advantages of a Shareholder’s Agreement

The main aim of the shareholder’s agreement is to bring certainty to the business relationship. In particular, a Shareholder’s Agreement will:

1. Make the partners think about and address the issues at the right time (earlier rather than later);
2. Create confidence between the partners as to the strategic direction of the business; and
3. Help avoid expensive disagreements.

Preparing the Shareholder’s Agreement

Prior to preparing the Shareholder’s Agreement, you should speak with all shareholder’s and get an understanding of what you want to achieve.  Then, seek the advice of an experienced solicitor who will be able to explain to you the legal implications and then draft the Shareholder’s Agreement for you.

As you can see, there are many issues to consider and an experienced solicitor can help ensure the Shareholder’s Agreement is tailored to suit you. It is easy to see why a Shareholder’s Agreement is an important tool in business planning.

If you have any questions relating to Shareholder’s Agreements, please do not hesitate to contact me.

I have recently had an enquiry from an international company in relation to its options with respect to establishing itself in Australia.

Essentially, a foreign company wishing to establish itself in Australia has three options:

1. Establish a representative office;
2. Register itself as a foreign company carrying on business in Australia;
3. Incorporate a new company.

Establishing a registered office

By establishing a registered office in Australia, the foreign entity may nominate an individual or an agent to represent the company in Australia. The representative may do a number of things, including being a party to court proceedings on behalf of the company, maintaining a bank account or collecting debts on behalf of the company.

However, having a representative office will limit the foreign entity’s ability to “carry on business” in Australia.

In order to carry on business in Australia a foreign entity must elect one of the following options.

Registering as a “foreign company”

If a foreign entity wishes to trade and carry on business in Australia using its existing entity, it must register itself as a foreign company carrying on business in Australia, with the Australian Investments and Securities Commission (“ASIC”).

Incorporation of a new company

Incorporating a new company in Australia will mean the foreign entity will need to register a new company in Australia. This could be a subsidiary of the foreign entity.  There are a number of types of companies that can be registered in Australia. Those which are most common are:

1. A public company; and
2. A private company.

Both of these structures have different characteristics that may or may not be suitable.

As you can see a foreign entity must conduct some due diligence before it is able to decide what its best option is with respect to establishing itself in Australia. If you would like to consider your options in more detail please contact me.

This was a question posed to me recently by a client who employs staff on a casual basis. My client risks a number of good staff leaving him, if he cannot offer them permanent employment.

However, the problem is that my client’s business goes through various periods of quiet. He wanted to know if he could stand down permanent employees without pay, during these periods.

While an employer could potentially include a “stand down without pay clause” in the contract, it would be unenforceable from a practical perspective. This is because the whole point of full time employment is the security of regular and systematic pay, which can only be cut in circumstances of under-performance or genuine redundancy.  Consequently, in order to standing down a permanent employee without pay, the employer would have to first follow a consultation process and providing reasonable notice- as in the case of genuine redundancy.

This isn’t great news for employers and brings me to the next question I was asked.

Can we force our employees to take annual leave during quiet periods?

As a general rule, it is up to each staff member when they wish to take annual leave. Some industrial instruments allow the employer to dictate when a staff member must take annual leave, which is usually during a period of shut down (i.e. Christmas and New Year) or if the staff member has an excessive amount of accrued annual leave.

Employment contracts can stipulate that the employer may direct the employee to take annual leave provided it is reasonable to do so. Of course, that is not to say that the employee could not refuse to take annual leave on the grounds of unreasonableness. In this regard, the following test would be applied to address reasonableness:

• the needs of the employee and the employer’s business
• any agreed arrangement with the employee
• custom and practice of the business
• timing of the direction to take leave
• if the period of notice given is reasonable.

This puts a financial burden on employers, particular if their business goes through periods of busyness for say three weeks and then a period of quiet for the next week or so.

The Solution?

I recommend that employers calculate how many ordinary hours and “over-time” hours their full time staff work each month, on average and what that equates to in terms of pay. The employer should then set the salary for their full time staff with that figure in mind.

Remember, at all times, the employee must be “better off overall” compared to his or her minimum entitlements i.e. the end figure when considering the actual hours worked.

This way, even though the employer is paying staff every week, even if no work is being performed, the employer will arguably not be at a loss because that work has already been performed in the previous two weeks, or as the case may be.

I recommend including a clause in the contract which stipulates that the staff member will be expected to work “X” amount of hours per week but that they may be expected to work additional reasonable hours to suit the needs of the business. Employers should advise each staff member that these additional hours have been taken into account when deciding on an appropriate salary.

Employers can also stipulate that these additional hours will not exceed a certain number of hours per week and that staff will be provided with paid time off during quiet periods to make up for the additional hours worked.

Please contact me if you have any questions about your employment contracts, as I would be more than happy to help.

I have recently been approached by a client who is travelling overseas indefinitely. The client is a trustee of his own self-managed superannuation fund.

The client was concerned, that as he was travelling overseas the self-managed superannuation fund may lose its residency status and wanted to appoint another person to act in his place as the trustee.

An Enduring Power of Attorney is a useful tool to allow this to happen. It is however very important that the intricacies of the Superannuation Industry (Supervision) Act 1993 (“SISA”) are complied with.

Some of the important points to consider are as follows:

1. Only an Enduring Power of Attorney will satisfy the requirements of SISA. A General Power of Attorney will not be sufficient;

2. Enduring Powers of Attorney take different forms and have different requirements in each State and Territory. This also must be taken into account;

3. The Enduring Power of Attorney must include authority for the person appointed as the attorney to act in relation to the superannuation affairs;

4. If there is more than one attorney appointed, only one of the attorneys can be appointed as trustee;

5. The member must be removed as a trustee, or director of a trustee company. The attorney must then be appointed as the trustee;

6. Once the attorney is appointed, they must then perform their duties as a trustee or corporate trustee director of the self-managed superannuation fund, rather than as an attorney. This obviously carries responsibilities. The attorney carries these responsibilities and obligations in their own personal capacity.

It is very important to ensure that the process is followed properly and all legal requirements are met. I will be more than happy to assist you. Please do not hesitate to contact me if you have any questions.