Posted Thu, 2013-08-01 11:22 by Janet Sparks

NEWARK – Three years ago, convenience store chain 7-Eleven basked in the limelight of being featured on CBS’s Undercover Boss. Today the world’s largest convenience store chain is under a different spotlight.

The franchisor is now fighting negative press surrounding its litigation against franchisees, as well as a federal investigation of human trafficking charges against its stores in New York, Virginia, and possibly other states. This week the 60-year old company learned it has a new battle to fight.

A lawsuit filed in New Jersey federal court on Wednesday against 7-Eleven, Inc. and its Japanese entities accuses the franchisor of fraudulent business practices and abuses, related to misclassifying employees as independent contractors.

Those abuses include manipulating the terms of the franchise agreement to deprive franchisees of equity in their stores, and discriminatory measures against certain store owners, those of Asian, Pacific Rim and Middle Eastern descent. The complaint claims the abuses have altered 7-Eleven’s business relationship with its store owners.

Gerald A. Marks, Louis D. Tambaro and Evan M. Goldman of Marks & Klein are representing the franchisees in the lawsuit, filed under Tamer G. Atalla, Neil Naik, Hemang Patel, Jayesh Patel, Kalpana B. Patel, and John Does 1-200. Lead counsel Jerry Marks said they now have additional franchisees who have joined the litigation. “We have approximately 60 people signed up, who will be added when we amend the complaint. I am looking to take this lawsuit nationwide.”

7-Eleven, employer in disguise

7-Eleven’s franchise agreement clearly states that their agreement “creates an arm’s-length business relationship” between independent contractor and franchisor. But Marks & Klein attorneys allege 7-Eleven is only attempting to insulate itself from franchisee claims that they are an employer. The complaint asserts, “7-Eleven, in actuality, significantly controls the day-to-day operations of its franchisees, rendering the parties’ relationship one of de facto employment.

That control is displayed in many areas of its operation listed here:

  • Regulation of vendors and product supply
  • Processing franchisees’ payroll through its owner internal payroll system
  • Regulation of product pricing, advertising and promotional materials
  • Intense daily oversight by market and zone managers of franchisee operations
  • Requirement that franchisees wear 7-Eleven emblazoned uniforms
  • Franchisees cannot control the volume on their televisions and, rather, 7-Eleven controls  that from their corporate headquarters in Dallas, Texas.
  • Franchisees are unable to change the temperature in their store and, rather, 7-Eleven controls that from their corporate headquarters in Dallas, Texas
  • Bookkeeping and all accounting done by corporate; and
  • Franchisees cannot withdraw money without corporate approval

By ignoring its true relationship with franchisees, the franchisees claim they are deprived of many employment-related benefits, including the following Federal Insurance Contributions Act (“FICA”) tax; social security withholding; unemployment, health insurance, and workers’ compensation.

There is another big issue. The alleged employment relationship is also based on the fact that 7-Eleven and its franchisees are engaged in the same type of business, and franchisees are not permitted to engage in business activity outside of 7-Eleven operations in their role as franchises.

7-Eleven, as an employer, would also be responsible for I-9 forms, to ensure compliance with immigration laws. As an alleged franchisor, they currently delegate that duty to franchisees.

7-Eleven’s additional violations as franchisor

Franchisees in the lawsuit also claim that 7-Eleven, as a franchisor, is unfairly competing with other brands. While other convenient stores in the area operate similarly to 7-Eleven, providing customers with food and beverage on a 24-7 basis, they are at a disadvantage. WaWa, Inc. and QuickChek have approximately 300 to 500 stores in New Jersey and New York, but they are properly classified as employees. That gives 7-Eleven the advantage of not providing employment-related benefits to its misclassified employees.

The lawsuit also states that 7-Eleven is in violation of rules established by the Securities Exchange Commission. “As 7-Eleven franchisees are nothing more than glorified employees, 7-Eleven is selling security interests to these franchisees/employees (by way of their franchise investment) without proper disclosure.”  It asserts that is in violation of securities laws.

Marks & Klein are claiming four counts against the franchisor. Those counts include violation of New Jersey’s franchise act, wage and hour laws, and law against discrimination. It also lists breach of implied covenant of good faith and fair dealing.

Parties respond

Jerry Marks declared, “This case is groundbreaking. When we succeed in proving store owners are employees, we will see to it that the 7-Eleven operators are fairly compensated for what they are due. That will include overtime pay, medical expenses, and pension benefits.” He said the employees will also be reimbursed the money they invested in the franchise, proving that the company violated various security laws. “Store operators will be entitled to all that money, including interest and penalties.”

Margaret Chabris, 7-Eleven director of communications, declined any interviews, stating, “The matter is in litigation, and at this time we are declining requests for public comment.”

During the Undercover Boss segment in February 2010, 7-Eleven CEO Joseph DePinto, who went undercover, stated, “There’s been a lot of bad press—some of it rightfully so—about bosses taking advantage of situations or not leading the right way. A lot of companies failed because of this.”

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.