United States: Brand Protection: The Case For Franchisor Auditing And Enforcement Of Franchise Agreement Compliance Clauses

Last Updated: October 11 2014
Article by Mary Pivec

Executive Summary:  The recent criminal prosecution of several 7-Eleven franchisees, which arose out of a criminal alien employment investigation, as well as efforts by government agencies to treat franchisors and franchisees as joint employers for the purposes of liability under federal labor and wage and hour laws, highlights the need for franchisors to take proactive steps to ensure they and their franchisees are in compliance with applicable labor, immigration and employment laws.

7-Eleven Franchisees Indicted as Part of Ongoing Investigation

On June 17, 2013, the U.S. Attorney for the Eastern District of New York issued a press release trumpeting the arrest and indictment of nine individuals and the lock-down of seven 7-Eleven franchise stores in connection with an alleged multi-state conspiracy to conceal systemic employment of illegal immigrants, exploit immigrant employees, and steal identities. The defendants owned ten 7-Eleven franchise stores located in Long Island, New York and coastal Virginia. U.S. v. Farrukh Baig et al., Case # 2:13-cr-00351 (E.D.N.Y.)

According to the indictment, the defendants signed multiple original and renewal franchise agreements authorizing 7-Eleven, Inc. (SEI) to terminate franchise rights and take over store operations if the franchisees failed to comply with all applicable laws and regulations, including employment and immigration laws. Despite SEI's lengthy franchise relationship with the defendants, the indictment notes that SEI failed to uncover defendants' illegal conduct and take legal action to terminate their franchises.

The U.S. Attorney's June 2013 press release noted that the government's criminal investigation of 7-Eleven franchisees is ongoing and that federal agents are in the process of executing search and seizure warrants to inspect approximately 30 other franchise stores nationwide. The results of the broadened investigation have yet to be disclosed. 

7-Eleven Inc. Sued by Franchise Operators for Wage and Hour Violations

In a related development, in October 2013, SEI was sued by four Indian franchise operators in New Jersey for alleged violations of state and federal minimum wage and overtime laws. Plaintiffs claim that SEI improperly classified them as independent contractors based on the degree of control SEI exercised over store operations, including regulation of vendors and product supply; franchisee payroll processing; control over franchisee bookkeeping and accounting; and alleged "intense" daily oversight by SEI market and zone managers. On August 5, 2014, U.S. District Court Judge Rene Bumb denied SEI's motion to dismiss the plaintiffs' wage claims, ruling that the allegations contained in the complaint, if proved, would entitle plaintiffs to relief under the Fair Labor Standards Act and the New Jersey Wage and Hour Law based on their status as "employees." Naik v. 7-Eleven, Inc., 2014 WL 3844792 (D.N.J. Aug. 5, 2014).

7-Eleven Franchise Operators Plead Guilty to Federal Criminal Charges

The latest development in the criminal case occurred on September 22, 2014, when five of the 7-Eleven operators charged in the June 2013 indictment agreed to plead guilty to the criminal harboring and wire fraud counts and to forfeit their homes and franchise ownership rights to the government. They also face additional criminal fines and up to 20 years imprisonment at sentencing, scheduled for February 18, 2015. 

The details of the plea agreement have not been disclosed, including whether the defendants have agreed to cooperate with prosecutors in their ongoing investigation. SEI sued the individual franchisees in October 2013 seeking to terminate their franchise agreements and take over store operations. On April 30, 2014, defendants Farrukh and Bushra Baig denied liability to SEI and asserted that SEI's claims for relief were barred by fraud, discriminatory business practices, culpability, unclean hands, unjust enrichment, self-dealing, violation of the covenant of good faith and fair dealing, waiver, equitable estoppel, and unfair and deceptive trade practices, among other affirmative defenses. Now that ownership of defendants' franchise and property rights has passed to the government, it appears SEI has a far different fight on its hands to recover ownership and control.

The Implications for Other Franchisors

The SEI experience should serve as a wake up call to U.S. chain store operators and other franchisors to consider whether they need to do more to audit and enforce the employment and immigration compliance provisions of their franchise agreements. Indeed, any corporate franchisor exercising similar degrees of control over franchise operations needs to consider the potential for its own criminal liability under the anti-harboring statute, 8 U.S.C. § 1324. Section 1324(a)(1) makes it a crime to conceal, harbor or shield an alien from detection in any place, including any building or any means of transportation, knowing, or in reckless disregard of the fact, that the alien entered or remains in the United States in violation of law, or to engage in any conspiracy to do so, or to aid and abet such violations. 

Forms I-9 and payroll records are among the categories of documents and things typically listed in criminal search and seizure warrants in harboring cases. An employer's failure to prepare and retain I-9s in accordance with the law and regulations is cited by prosecutors as circumstantial evidence of reckless disregard of the employment of undocumented workers. Likewise, evidence of complicity in document fraud has been held to constitute "concealment" under the harboring statute.

Undocumented alien workers at the location named in the warrant constitute "contraband" and typically are arrested, detained, and interrogated by government agents regarding the employer's knowledge of their immigration status as well as the employer's compliance with wage and hour and health and safety laws. Wage theft, passport seizure, and threats of deportation for reporting the employer serve as aggravating factors under the harboring statute and may also be used to build a case for the separate crime of human trafficking. Employee victims can qualify for work permits by cooperating in the investigation and successful prosecution of offending employers.

Where the line between independent contractors and employees is blurred vis-à-vis a franchisor and its franchisees, as alleged by the operators in the Naik complaint, a franchisor may find itself exposed to liability for the franchisee operator's failure to comply with the I-9 requirements or otherwise to ensure that the documents used in the employment verification process were not obtained fraudulently with the assistance of the operator. Likewise, the franchisor may find itself named as a defendant in lawsuits filed by employees of the franchisee for wage and hour and other labor protective statute violations.  

The Bottom Line:

To limit their exposure to civil and criminal liability for franchisee and subcontractor violations, many franchisors and government contractors have implemented labor and immigration compliance policies that require franchisees and subcontractors to engage independent auditors, at the franchisee/subcontractor's expense, to review their I-9, payroll, and personnel records and practices, and to certify annually that they are in compliance with all wage and immigration recordkeeping requirements. Alternatively, or in addition to requiring independent compliance audits and certification, some franchisors and prime contractors have created their own wage and immigration compliance teams or have hired outside counsel to conduct wage and immigration compliance audits. If violations are found, franchisees and subcontractors are required to take prompt corrective action or face termination.  

For franchisors and government contractors that are publicly held, implementing similar controls and procedures is fast becoming a "best practice" – and highly recommended by regulators, risk managers, and insurers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions