Minimising the risks of franchisee non-compliance

Franchisors should take steps to ensure their franchisees are complying with all legal and contractual requirements, says national accounting and advisory firm RSM Australia.

Franchises are currently under the spotlight following breaches by high-profile brands. Often, when franchisees fail to comply, it’s to save money but, while this may save pennies in the short term, the potential reputational damage is not worth it.

“It’s far more important to maintain your reputation by paying workers appropriately, for example,” RSM Australia National Head of Business Advisor Andrew Graham said.

“Since franchisors have internal compliance requirements as well as regular business requirements, it’s even more important to keep a close eye on all operations to make sure they measure up.”

Franchisees are responsible for workplace health and safety, insurance, fair pay, and superannuation contributions. Failing to comply means the franchisee is breaking the law and the franchisor can, in some cases, be held responsible. There is no room for franchisee non-compliance since the actions of even one franchisee can affect the reputation and income of all other franchisees in the network.

“Ensuring franchisees comply with legal requirements is important not just for the health and happiness of employees, but to protect the business and its profits,” Mr Graham said. “Therefore, franchisors should monitor their franchisees closely to make sure they’re always compliant.”

If franchisees fail to comply either with the franchise agreement or with external requirements, the franchisor can terminate the agreement.

“Ensuring compliance starts with the franchise agreement,” Mr Graham said. “All expectations, requirements and potential penalties for non-compliance should be laid out clearly so the franchisee understands the responsibilities.

“Once the agreement is in place, it’s important to communicate regularly with franchisees to ensure they are using all systems and processes correctly to maintain compliance. A conversation is a good starting point and should be followed up with a formal audit. If there are any discrepancies, both the franchisor and the franchisee should know what policies to follow to either report the issue or rectify it.”

Part of diligent monitoring is staying on top of any legislative changes and communicating those to the franchisee so there are no excuses for errors. Franchisors should also implement stringent accounting procedures and audits.

“That way, if the worst does happen and a franchisee becomes non-compliant, the franchisor can discover the problem sooner and, ideally, rectify it straight away,” Mr Graham said.

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