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MORE NZ LEGISLATION COULD AFFECT FRANCHISORS, FRANCHISEES

by Deirdre Watson,
last updated 18/06/2013

June 2013 - Two proposed changes with consequences for franchising are currently winging their way through the legislative channels

Barrister Deirdre WatsonTwo pieces of legislation currently working their way through the usual channels will affect the franchising industry in New Zealand if, as seems very likely, they are enacted. Both have attained considerable traction. They are: 

  • Proposed changes to Part 6A of the Employment Relations Act 2000; and
  • Commerce (Cartels and Other Matters) Amendment Bill.

This article briefly explains each of the above and comments on where they will raise challenges for franchisees and franchisors. The franchise sector needs to ensure it understands these proposed changes and any business or person that does not agree with the changes is encouraged to make their own independent submissions.

It is my view that the changes will, if enacted, be bad for franchising and will slow down commercial growth. They are a good example of franchising being caught in the tangle of wider commercial and social problems that affect society. As an industry, franchising has to be strong in declaring itself to be very different from other business models, with protections already in place to ensure weaker contractual parties and the end consumer are not disadvantaged.

Changes to part 6A of the Employment Relations Act

Part 6A of the Employment Relations Act was enacted to provide protections for certain groups of employees in the cleaning, orderly, catering and laundry industries. The protections kick in when the employer’s business undergoes restructuring and the employee’s work is assigned to a new employer (eg. because the contract has been awarded to another party). Under Part 6A, those employees have a right to transfer to the new employer on the same terms and conditions of employment.

Part 6A was designed to manage possible disadvantage to vulnerable employees as a result of repeated renewal of their employment contracts following a restructuring, sale of the business or the awarding of contracts from their employer to another party.

The provisions were designed to ensure that when a business was sold, or a contract changed hands, the terms and conditions of an employee’s contract were not then ratcheted down and tinkered with, thus disadvantaging the “vulnerable” employee. Prior to Part 6A being enacted, vulnerable employees were constantly exposed to changes in their wages and hours every time there was a restructure

Without a doubt, there were plenty of good moral and policy reasons for the enactment of Part 6A and, as a whole, Part 6A is here to stay. However, Part 6A has proved troublesome for many SME's; in particular, the fact that it is the employees who have the right to choose whether their employment is transferred had caused problems.

In franchising, especially in the area of cleaning franchises, Part 6A has meant that a franchisor who wins a contract can be forced to take on employees from an outgoing contractor, despite the fact that the reason the new contract was awarded to someone else was the useless job being done by the outgoing contractors’ employees. (A campaign against Part 6A was launched by the CrestClean franchise last year. CrestClean has twice fallen foul of what it says is an ambiguous law - Ed.)

A key aspect of the Part 6A change proposed, and very much welcomed by businesses and employers, is that businesses with fewer than 20 employees will be exempt from Part 6A, when they take over a new contract. 

As was recently reported by the Franchise Association of New Zealand, the trouble for franchising is that the Government is proposing to create a class of 'associated persons' to be taken into account, as well as those of the employer, in tallying up the numbers of employed persons in order to attract the exemption. The consequence is that both a franchisee AND the franchisor must employ fewer than 19 persons between them in order to be exempt from Part 6A. This is, as was explained recently to FANZ in a letter from the Minister of Labour, Hon Simon Bridges, to 'help ensure that only genuine small-to-medium businesses are exempt.'

The purpose of the 'associated persons' limitation is to prevent large employers from setting up SME’s to take advantage of the exemption. 'Associated persons' will include the incoming employer, the parent company of the incoming employer, other subsidiaries of the parent company, other subsidiaries of the incoming employer, subcontractors engaged by the incoming employer and the immediate franchisor of the incoming employer.

Under this very wide definition, a cleaning franchisor who secures a contract for work will not be exempt where the total numbers of persons employed by the franchisor and the franchisee exceeds 19.

That the exemption could potentially not apply in franchising seems to completely misunderstand the true contractual and commercial nature of franchising. The respective businesses of franchisor and franchisee are legally and commercially separate. They are not joint ventures, they are not related entities and they are not partnerships. They rely on each other for commercial success, as do any contracting parties, but therein ends the commonality. 

The purpose of the 'associated persons' definition, as currently proposed, is to avoid the multiple setting up by one company of subsidiaries or other entities as a means of avoiding compliance, thereby using the company structure as nothing more than a device.  In franchising, this could not be farther from the commercial reality of what goes on. There is nothing about the franchising model which suggests the sort of commercial contrivance or device sought to be caught by the purpose of the 'associated person' definition.

These are important distinctions which have been completely misunderstood by whoever has deemed it necessary to bring franchising under the umbrella of the 'associated persons' definition.

If this legislation affects your business, I urge you to make submissions on this legislation, which, in its current form, will continue to be a bind for franchisors (to say nothing of the affected employees) if enacted in its current form.

The Employment Relations Amendment Bill can be viewed in its entireity here. Details of how to make a submission can be found here. Submissions must be made by Thursday 25 July 2013.

Cartels Bill

Introduced in 2010, the Commerce (Cartels and Other Matters) Amendment Bill represents the largest amendment to the Commerce Act since it was enacted in 1986.

In May this year it was reported back from Select Committee and is now one certain step closer to enactment.

There are essentially two underlying drivers behind the proposed enactment:

a) To bring New Zealand's competition laws in line with those of Australia, as part of the Single Economic Market.

b) To enhance the identification of, and enforcement against, global cartels by facilitating the Commerce Commission's ability to co-operate with overseas regulators.

In relation to cartels, the bill intends to:

  1. Clarify the scope of prohibited behaviour
  2. Introduce new exemptions, including exemptions for collaborative activities and vertical supply arrangements
  3. Introduce criminal sanctions for hard-core cartel behaviour.

A key feature of the bill is a prohibition on agreements containing 'cartel provisions'. The bill provides that no person may enter into a contract which contains a cartel provision, unless they can rely on one of the statutory  exemptions.

A 'cartel provision' is defined as a provision, contained in a contract, arrangement, or understanding, that has the purpose, effect, or likely effect of one or more of the following in relation to the supply or acquisition of goods or services in New Zealand:

a) price fixing
b) restricting output:
c) market allocating.

In the draft bill, 'market allocating' means allocating between any two or more parties to a contract, arrangement, or understanding, or providing for such an allocation of, either or both of the following:

a) the persons or classes of persons to or from whom the parties supply or acquire goods or services in competition with each other;
b) the geographic areas in which the parties supply or acquire goods or   services in competition with each other.

Anyone reading this definition will be immediately alarmed to see how readily it could apply to franchises. Under this definition, franchises are a form of market allocation.

The bill provides for certain categories of exemptions. If the activity falls within an exemption, there will be no breach of the Act. Relative to franchising, there is arguably an exemption for 'collaborative activity', as follows:

'(1) Nothing in section 30 applies to a person who enters into a contract or arrangement, or arrives at an understanding, that contains a cartel provision, or who gives effect to a cartel provision in a contract, arrangement, or understanding, if, at the time of entering into the contract, arrangement, or understanding or giving effect to the cartel provision,

     (a) the person and 1 or more parties to the contract, arrangement, or understanding are involved in a collaborative activity; and

     (b) the cartel provision is reasonably necessary for the purpose of the collaborative activity.

(2) In this Act, collaborative activity means an enterprise, venture, or other activity, in trade, that —

     (a) is carried on in co-operation by 2 or more persons; and

     (b) is not carried on for the dominant purpose of lessening competition between any 2 or more of the parties.

(3) The purpose referred to in subsection (2)(b) may be inferred from the conduct of any relevant person or from any other relevant circumstance.'

The exemption for collaborative activity does not make it clear that franchising will qualify for an exemption.

Sensibly (and in line with a recommendation made by FANZ), the report back from Select Committee has stated:

'We encourage the Commerce Commission to develop specific guidelines for its application of the provisions of the bill to various franchise systems. This would provide more certainty as to whether the collaborative activity exemption might be applied to particular franchise arrangements.'

It remains to be seen what form these guidelines will take and all franchise businesses should be urged to keep a close eye on developments. I would hope the guidelines provide for a wide definition of franchising so that there is no room for doubt that businesses of a genuine franchising nature are exempt.

Criminalisation of cartels is a significant development in competition law, and when making this change, as has been pointed out in the NZ Law Society’s submissions to the Select Committee, it is important that there remains certainty for bona fide business people. It would be absurd if a genuine, bona fide, franchise business became entangled in the coverage of this legislation.

Without a full exemption for genuine franchise agreements, if enacted the bill will, through seeking to achieve its pro–competitive purpose by driving out Cartel behavior, unwittingly serve to criminalise arrangements like franchising, which are legitimate and indeed promote competition because they encourage competitive behaviour in the market.

Read the Commerce (Cartels and Other Matters) Amendment Bill in its entireity here.

Read evidence (including submissions) on the Bill here.

Read the submission from FANZ here.

Conclusion

Any franchise business worried about these legislation changes should address this by lodging their own submissions.

The franchising sector, having escaped the noose of its own purpose-built legislation several years ago, will continue to come under the legislative spotlight. It is short-sighted not to expect that trend to continue and, as a sector, the franchise industry needs to be ready to continue to address these changes as they come. 

As an aside, one can’t help but wonder if a single, overarching, piece of legislation dealing specifically with the franchise industry might not, after all, have served some beneficial overall purpose - not the least of which is it would have enabled the sector to be able to point to that legislation as a reason why further legislation was unnecessary. Also, it might have cleaned out the dodgy operators from the industry and, with the Australian experience to learn from, we could have cut back significantly on some of the more draconian and cumbersome features of Australian legislation which have been well complained about elsewhere. (See latest Code review recommendations - Ed.)

However, hindsight is a great thing and my point is that these types of challenges will continue to be faced over the upcoming years.

Discuss

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1
comments
vincent @ June 14th, 2013, 11:47 AM

Great article.

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