7-Eleven Franchisees Busted for Slave Labor, Others Likely

“7-Eleven is taking so much more of the money in franchise fee and everything else, that franchisees are almost forced to do something like this to survive.” He added, “Franchisees have to figure out how to make enough money just to stay in business. I’ve seen store owners with three employees, each working 365 days a year, 14 to 18 hours a day, 7 days a week.”

Blue MauMau
June 24, 2013

7-Eleven Franchisees Busted for Slave Labor, Others Likely
by Janet Sparks

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HSI Officers in front of 7-Eleven. photo/hsi

BROOKLYN, New York – The U.S. Attorney’s Office announced last week Monday that eight men and one woman from Long Island were indicted for wire fraud, identity fraud and concealing illegal immigrants employed at 7-Eleven convenience stores.

The franchisees, who owned and managed fourteen locations in Long Island and Virginia allegedly hired dozens of illegal immigrants, equipped them with stolen identities from U.S. citizens, housed them at residence owned by the franchisees, and stole a substantial part of their wages. Forty other 7-Eleven franchises in New York City and elsewhere are being scrutinized in one of the largest criminal immigrant employment investigations ever conducted by the Justice and Homeland Security Departments, officials said. 7-Eleven corporate has not been indicted.

The announcement was made by the U.S. Attorney’s Office, Homeland Security Investigations, Office of Inspector General, Social Security Administration and Superintendent of the New York State Police, among other government agencies. U.S. Attorney Loretta E. Lynch called the scheme an “elaborate criminal enterprise.” She said the defendants not only systematically employed illegal immigrants, but concealed their crimes by raiding the cradle and the grave to steal the identities of children and even the dead.”

The US Attorney didn’t stop there. “These defendants ruthlessly exploited their immigrant employees, stealing their wages and requiring them to live in unregulated boarding houses, in effect creating a modern day plantation system,” she said. Homeland Security Special Agent James Hayes, Jr chimed in saying, “This charged criminal scheme had a vast detrimental effect on both the employees who were overworked and cheated out of wages, as well as the more than 25 American citizens whose lives were upended by the theft of their identities in furtherance of the scheme.”

The indictments filed in New York federal court, eastern division, name the defendants as Farrukh and Bushra Baig, a married couple who own twelve 7-Eleven franchise stores. Two of Farrukh’s brothers who assisted him in managing and controlling the stores have also been named in the case, along with three others who were also involved. In a separate indictment, brothers Ahzar Zia and Ummar Uppal, who own and control two 7-Eleven’s in Suffolk County, were charged.

7-Eleven Corp. chastised by U.S. government for “little to no effort to ensure integrity of payroll system”
The US Attorney’s news release said the franchisees received a license from 7-Eleven, Inc. corporate office to utilize the company’s trademarks, specialized equipment and the buildings owned by 7-Eleven. It also states, “The [franchisee] defendants also received access to 7-Eleven’s automated payroll service, through which they inputted each employee’s personal identifying information and hours worked into the data terminals located at the stores, for electronic transmission to 7-Eleven corporate headquarters. Working with the data provided by the defendants, 7-Eleven processed the payroll and, after subtracting certain expenses, issued wages in the form of checks, direct deposits or debit cards.”

New York Times reported this week that the operation escaped notice, some for more than a decade, because the national company, 7-Eleven, Inc., which has 7,600 U. S. stores, did not have safeguards in place to protect its payroll system from employee fraud. One example given was that two employees were using the same Social Security number. “Loretta E. Lynch, U.S. Attorney in Brooklyn, whose office helped in the investigation, said there was “little to no effort to insure the integrity of their payroll system,” wrote the New York Times.

Are 7-Eleven franchisees really employees in disguise?
That could bring up another problem for 7-Eleven headquarters, which stresses that its franchisees are independent contractors, not employees.

Recent litigation has highlighted the liability a franchisor can have in providing payroll services to its franchise owners. If a court decision should determine that 7-Eleven misclassified employees as “independent contractors” or franchisees, many of the costs and fees it collected by deductions could have to be reimbursed to store owners.

The International Franchise Association’s Franchising World magazine reported on this important issue in its May 2013 edition. It states, “Federal and state enforcement agencies have made worker misclassification a top priority, and the consequences for misclassification can be significant.” It further warns,

In addition to owing back pay, overtime and benefits to a misclassified worker, the employer may be ordered to pay back taxes, interest and fines. In some states, employers that intentionally misclassify a worker may also face criminal charges or stop-work orders."

IFA also explains there are three factors that the Internal Revenue Service examines when determining if a company is misclassifying employees as independent contractors. In addition to exerting control over workers’ performance, and over the financial and business aspects of his/her job, the IRS also looks at the relationship between the worker and employer. It states, a worker “cannot waive his or her employee status through a contract or otherwise.”

Franchisee attorney Justin Klein of Marks & Klein said franchisors that exert more control than what is normally seen in a franchisee-franchisor relationship run the risk of situations like this one in 7-Eleven. “There are huge potential problems for the franchisor where they are allegedly complicit, even by association, with the alleged misconduct.”

Klein, who currently represents 7-Eleven franchisees in a class action lawsuit, added, “I think 7-Eleven is notorious for living in the pockets of its franchisees and distancing themselves when the franchisees have problems.” He said it is well-known that franchisees are not happy with 7-Eleven corporate.

7-Eleven warns franchisees of mandatory review of I-9 forms by corporate
7-Eleven’s chief operating officer Darren Rebelez informed franchise owners last Thursday that the company will be reviewing their I-9 forms, proving employees are legally working in stores. “This letter is to remind you of the required I-9 compliance steps and to outline some of the consequences for failure to comply. These requirements are mandatory for all franchisee,” he warned. He said field consultants and market managers would be conducting reviews on site to evaluate compliance of stores starting on July 1. He added, “failure to comply will result in serious consequences, including the possible termination of your franchise agreement.”

Rebelez outlined the penalties franchisees could face. He said incorrect or incomplete I-9 forms could result in fines from governmental agencies of $110 to $1,100 per form. He adds that the company acknowledges franchise owners are the “sole employer of all associates in your stores, and we are not attempting to interfere with your employment relationship or control how you hire, fire or manage your employees.”

David Hendricks, former multi-unit owner of 7-Eleven stores in California, said it is interesting that 7-Eleven would make that statement. “If 7-Eleven can require that a franchisee have four certified order writers as employees in their store, how does that make the franchisee an independent contractor?” he asked, adding, “It doesn’t. It takes it away.” He said when the company is telling the franchisee he has to have a certain number of employees, he is no longer an independent contractor.

One franchise owner who has been in the 7-Eleven system for decades said he’s surprised that the government doesn’t go after 7-Eleven for the control they have over franchise owners. “7-Eleven franchisees do not meet the guidelines to be classified as an independent contractor,” he said. He thinks they should be investigated.

Former 7-Eleven owner says franchisor has systematically pulled out franchisee profits; asked for this disaster
Margaret Chabris, director of corporate communications for 7-Eleven, Inc., declined an interview but issued this statement to Blue MauMau.

On Monday, the U.S. Attorney’s Office in Brooklyn announced it had filed two indictments related to alleged wrongdoing by independent 7-Eleven franchisees. 7-Eleven, Inc. has cooperated with the government’s investigation. All of our franchise owners must operate their stores in accordance with laws and the 7-Eleven franchise agreement.

7-Eleven, Inc. will take aggressive actions to audit the employment status of all its franchisees’ employees. 7-Eleven, Inc. is taking steps to assume corporate operation of the stores involved in this action so we can continue to serve our guests. We continue to cooperate with federal authorities in this matter.

Hendricks thinks 7-Eleven will not investigate anything. “7-Eleven cannot afford as a franchisor to interfere too much with this practice because of what’s stated in their franchise agreement. The documents say that the franchisee is a hundred percent in control of hiring, firing and managing their employees, even though 7-Eleven has overstepped that boundary. Corporate dictates to franchisees how they are to manage their employees.”

Hendricks, at one time was on the board of the National Coalition of Associations of 7-Eleven Franchisees (NCASEF), an independent trade association for 7-Eleven franchisees nationwide. He was also president of the Franchise Owners’ Association of Greater Los Angeles Area. NCASEF oversees 38 owners groups (FOA) across the country. After being involved in heated litigation and mediation with 7-Eleven Corp. on this same issue, the franchisor settled the dispute and bought him out.

NCASEF chairman Bruce Maples did not return phone calls to be interviewed for this report. He did however post a news release on Tuesday in response to the two indictments:

Members of the National Coalition of Associations of 7-Eleven Franchisees pledge to observe the highest standards of competency, fairness, and integrity in the conduct of their relations as franchised owners of 7-Eleven stores. Every franchisee is an independent contractor, and solely controls the operation of their store(s). The National Coalition expects every member of our organization to operate their stores in an ethical and honest manner, in accordance with all U.S. laws and consistent with the 7-Eleven franchise agreement.

The Coalition represents approximately 4,700 convenience store owners who employ over 40,000 workers.
Hendricks said 7-Eleven’s recent changes in its practices have created such a tight scenario in that “7-Eleven is taking so much more of the money in franchise fee and everything else, that franchisees are almost forced to do something like this to survive.” He added, “Franchisees have to figure out how to make enough money just to stay in business. I’ve seen store owners with three employees, each working 365 days a year, 14 to 18 hours a day, 7 days a week.”

The former franchisee thinks many 7-Eleven franchisees are going to keep quiet about this

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Risks: Abuse inherent in modern franchising, Afraid to talk, Blame the franchisee, Blocking for the industry, Buying a job, Cannon fodder, Cat's-paw: being used unwittingly to do another’s bidding, Class action lawsuits benefit lawyers, not franchisees, Class-action lawsuits: lawyers take majority of risks & spoils, Cognitive fluency: what is seen simpler, is perceived to be more true, Conspiracy, Conspiracy to commit fraud, Conspiracy to hide the true nature of events in order to avoid detection, Controlling, trapping or defeating the franchisee, Deceptive business practices, Emboldens industry bottom-feeders, Employees misclassified as franchisees or independent contractors, Evil: the exercise of power to intentionally harm people, Externalities: cheap business decision when someone else pays, Extreme losses call for extreme remedies, Family donates labor to keep franchise going, Fear mongering, Franchise agreements are so complex, they are breached the moment they're signed, Franchise business model perfectly suited to enable massive fraud, Franchisee, independent contractor or employee?, Franchisee, independent contractor or employee?, Franchisor corporations designed to keep franchisee fees but shirk liabilities, Franchisee is pawn in massive fraud, Franchisees are frequently the canary in the fraud mine, Franchisor overcharges for required products, Franchisor tries to break franchisee association "union", Fraud, Fraud is widespread, Fraud victims many times do not step forward, Fundamental human rights inconsistent with industry practice, Gouging on supplies, Government as system’s ultimate liar, Gross margin controlled by franchisor, Guilt: pain caused by doing what you know to be wrong, I own the assets but the franchisor controls them, Ideas once outrageous are now considered normal, Identity fraud, Identity theft, Immigrants as prey, Illusion of government oversight, Immigrants as prey, Independent franchisee association, Indentured servants, Just a few bad apples, Knew or could have reasonably been expected to know, Labor cost minimization consequence, Language shortcomings create a vulnerability, Law grinds the poor, and rich men rule the law, Like a medieval marriage, Model of de-regulated free-marketeers, Moral Hazard: a party insulated from risk behaves differently than if the full risk were present, Must buy only through franchisor (tied buying), Must sell business (eventually) through franchisor, My franchise was a prison, National cultural icon?, No justice in legal system, Old-fashioned idea that politicians are relevant, On Cooling the Mark Out (Erving Goffman), One franchisee turned against the other (action very difficult), Opportunism: contract creates powers which are used to strip investor value during relationship, Outstanding investigative journalism, Overt influence of trade association, Past the Tipping Point of public contempt for franchising, Pawns in a game they can't win, Political contributions by franchisors (v. franchisees), Preying on the economically poor, Proceeds of crime, Prospect Theory: loses hurt much, much more than comparable gains, Protect gross negligence, wanton recklessness and intentional misconduct, Public perception of sleaze and greed, Right to associate and right to harass, Risk much higher for franchisee than independent business, Rogue operators adapt much quicker than oversight agencies, Scapegoating, Sharecropping, Shocked, I tell you: just shocked, Should anyone trust anything associated with franchising anymore?, Shunned, Situationism psychology: people are influenced by external factors more than internal traits, Slap on the wrist for white-collar crime, State sanction, Symbiotic relationships (industry, banks, lawyers), Test for franchisee, independent contractor or employee, The Fixer fixes for a hefty price, The game is rigged, Theft, Trade association fronts and defends best and worst franchisors, Trade association propaganda, Trade association tells elected officials how to do their job, Trading in false hope, Trap for the trusting, Uncharacteristically shy with media requests, Unjust enrichment, Unsafe at any Brand?, Unsafe at any Brand?, Willful blindness, Wire fraud, United States, 20130624 7 Eleven franchisees

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