Campaign launched as franchises threatened by legislation

A major campaign is being launched today to encourage franchisors, franchisees and other affected parties to make submissions on the repeal of Part 6A of the Employment Relations Amendment Bill.

The particular concern for franchises is that while it is proposed to exempt SME’s from the Bill, which gives certain groups of employees the right to transfer to the new employer on the same terms and conditions of employment when a business changes hands, the Government is proposing to create a class of "associated persons" that means a franchisee AND the franchisor must employ fewer than 19 persons between them to be exempt. This is, in the words of a letter from the Minister of Labour, Hon Simon Bridges, to ‘help ensure that only genuine small -to medium businesses are exempt.’

In other words, this Bill is saying that franchises are not genuine SME’s and that franchisors and franchisees may be classed together as a single entity for the purposes of the law.

A slippery slope for franchising

‘I have deep concerns that this is the start of a slippery slope for the New Zealand franchise industry,’ says Grant McLauchlan, managing director of Crest Commercial Cleaning Limited which has organised the campaign. ‘The proposed amendments to this section of the Act would create a whole new legal relationship between franchisor and franchisee. Once franchisors and franchisees are grouped together as "associated persons", any future administration could easily extend this, for example, for tax purposes.  As a result, franchises could be denied tax deduction at some level, or franchisees and franchisors could be treated as one by the IRD.'

As an example of the way in which such a breach can be widened, in a letter to Franchise Association members Vice Chairman Ian Robertson has pointed out, 'Until 2008, the Queensland State Government aggregated Bank of Queensland franchisees together with the Bank for liability to payroll tax, as combined, they paid more than $1m a year in wages.'

Grant McLauchlan, himself a qualified accountant, says, ‘This is a real threat to franchising. Right now, the New Zealand franchise industry needs a weakening of our independent contractual relationship like a hole in the head. We need to ensure this "associated persons" clause proposal is stopped dead in the water.’

Website, cards and submissions key to opposition

A new website http://www.part6a.org.nz/ outlines the issues and makes it easy for those concerned to make submission. The campaign has also produced 20,000 postcards that can be sent to the Minister of Labour.

According to the website, ‘The proposed amendments to [Part 6A] of the Act would create a whole new legal relationship between franchisor and franchisee that would create not only an unfair competition between a franchisee and an independent small business, but also has major implications for the future of the independence of the two entities.

The independent – although interdependent – nature of the franchisor franchisee relationship has been fundamental to the development of franchising worldwide. As a 2011 resolution by the World Franchise Council stated, ‘The relationship between a Franchisor and a Franchisee is based and founded upon legal and financial independence. This principle constitutes a fundamental rule of franchising, applied internationally. It does not only constitute a practice of years for franchise networks all over the world, but is also met in different local laws for franchise in different countries.’

Auckland barrister Deirdre Watson has reinforced this point in her recent article on Part 6A and other legal issues affecting 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.‘

Widespread opposition

While Part 6A was originally aimed at the cleaning, orderly, catering and laundry industries, it has attracted widespread opposition from other businesses, too. The campaign website quotes excerpts from the submissions of companies as varied as Air New Zealand, Transfield Services and Progressive Enterprises as well as many cleaning companies and industry bodies such as EMA, Business New Zealand and Hospitality New Zealand. The Franchise Association has also published briefing notes for those wishing to make a submission.

Respected law firm Simpson Grierson notes, ‘Our general view is that Part 6A unnecessarily complicates the tendering process. In particular, it can be very difficult for an incoming employer to know exactly what costs it will be assuming, to determine the quality of the employees it will inherit or to shape a new structure to deliver the services.’

And Grant McLauchlan summarises, ‘All businesses around New Zealand are being negatively impacted by this poorly drafted, ill-targeted and unworkable legislation – and franchises are especially vulnerable. That’s why they need to work together and get in behind this campaign, and that’s why the Government should repeal Part 6A.'

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