What Not To Do

By Arnold J. Hauptman, Esq., General Counsel, UFOLINY

To the best of my knowledge, 7-Eleven has long since installed in every franchised store a video system capable of viewing, 24/7, all operations of a store in either recorded or real time. In other  words, except for your bathroom and office, there is an eye in the sky that can watch every movement and every person in your store, and without you knowing it. Think of the 1949 novel 1984 by George Orwell, in which he predicts a future society where “Big Brother” (the government) is constantly spying on every inhabitant.

I can recall when SEI first announced its plans to install the camera system. It happened in or around 2012, when I was the National Coalition counsel. The Coalition members vehemently  objected to such installations as being an unwarranted and unnecessary invasion of privacy, and inconsistent with the franchisee’s status as an independent contractor. Mediation ensued, with litigation being avoided by SEI’s assurance that the system would be used primarily for training purposes, and not as a “gotcha” program.

So much for that assurance. I have been involved in a few situations where a franchisee has been served with multiple Material Breach Notices al-leging: a) failure to pay an employee for the full amount of hours worked, b) having one or more persons working in the store who were not listed on the payroll register, c) failure to pay those employees’ and other employees’ minimum wage, d) failure to pay overtime at proper overtime rates, and (e) as a result of the above lapses, failure to accurately pay federal and state payroll expenses such as social security, Medicare, workmen’s comp, etc.

SEI would base these allegations on Paragraph 8(a) of the Store Agreement, which provides that you must “comply with all local, State and Federal laws, statutes regulations, ordinances, and rules of any applicable governmental entity with respect to the operation…of the Store.”

The Breach Notices are supported by a video of your store taken over a full one-week period which has been reviewed by SEI’s Asset Protection team to determine, among other things, whether or not all of your “employees” are listed on the payroll register, if each employee is being paid for his or her hours worked and at minimum wage, if each employee is paid for overtime at the proper rate and, at least in New York, if any employee is paid for an additional hour for any day in which he or she works more than 10 hours. Upon request, the full one-week video is made available to the franchisee to confirm or disclaim any of SEI’s allegations.

While I represented only a few franchisees in these matters, which were ultimately resolved, I am guessing that there are many more such cases throughout the country Satisfying these alleged breaches can be costly and time consuming, since the one-week viewing period can be a year or more prior to the breach notices being issued. How SEI picks and chooses which franchise store to record, I do not know. It could simply be random, but more likely I am guessing the selection came from a tip from a field consult-ant or market manager who suspects wrongdoing. If the breaches are not cured, termination could come next, and nobody wants that.

So what is the takeaway from this article? NEVER, NEVER, NEVER (10 more Nevers) employ a person—whether or not documented—who is not accurately set forth on your payroll register. ALWAYS, ALWAYS, ALWAYS (10 more ALWAYS) pay every employee for each and every hour worked, including overtime pay, if applicable, and make sure that all required Federal and State payroll deductions are taken. Keep in mind that, in most states, certain employees that are managers and meet a payroll level with supervisory duties are exempt from overtime pay. In New York, for 2020, and except for New York City, that level is $50,700 per year. Check with your state’s Department of Labor.

My best advice to avoid the above situations is to have each and every employee clock in and clock out on the register, and to make absolutely certain that no employee is actually working before or after clocking in or out.

While I continue to believe that such video “reviews” by SEI of store operations is an unwarranted intrusion on the busiess of an independent contractor, I certainly cannot and do not condone any of the unlawful payroll practices described in this article—and neither should any franchisee. Question: is this one more aspect of SEI’s control which may add to the characterization of franchisees as employees? Interesting question.

Stay out of trouble and let’s hope for a great post pandemic recovery.