Common Mistakes Of Small Business Employers


To those franchisees who attended my presentation on avoiding employment mistakes at the last NCASEF Convention in Las Vegas, please forgive me because you may have already heard all of this. Any Avanti readers who missed my presentation can benefit from the information below. Most of you may already know much of this basic and logical information, but it is dispiriting to me how many 7-Eleven franchisees fail to follow these important rules, resulting in serious troubles with their employees, 7-Eleven, Inc.­­ and governmental regulators.

Failure to follow employment laws causes very expensive problems for small business owners, and 7-Eleven franchisees are no exception. At my firm, we regularly encounter difficulties franchisees suffer due to their failure to avoid common traps when employing staff for their stores. Franchisees can avoid these difficulties by following the simple rules described in this article.

Earlier this year, SEI instituted a program of certifying compliance with the federal law by inspecting the USCIS Employment Eligibility Verification Form I-9s and requesting certifications from certain franchisees that an I-9 has been completed for each employee due to notorious problems of certain franchisees hiring undocumented workers. Please read Executive Vice President Jivtesh Gill’s article in the previous Avanti regarding this issue. SEI and various governmental agencies are watching to be sure you comply with the law, and your failure to do so can be catastrophic.

SEI often uses storeowners’ illegal employment practices to terminate franchises. These practices include paying cash to employees and hiring undocumented workers. SEI is especially sensitive to these issues now and is aggressively seizing franchised stores for violations, particularly when combined with other problems in the store operations.

In order to avoid major problems with employees in your stores, you and your store managers should follow these basic rules:

Rule No. 1
Never Pay Employees In Cash

Employees should always be paid through the 7-Eleven payroll system. Have the employee log in and out on the computer himself/herself (see Rule No. 3, below). There are many reasons for this.
• Employees “forget” having been paid in cash. Later, when they go to court or to the State Labor Commissioner, they will deny having been paid and you will have no proof they were paid and/or how much they received.
• Employees almost never report the income paid to them in cash on their tax returns or pay the taxes on that money. If the Federal or State government learns about the income paid to the employee in cash, the employer is fully liable for any income tax and other taxes not paid by the employer and/or employee, and, since it is a federal crime to fail to withhold taxes for an employee, there is an additional penalty of 100 percent of the taxes not withheld for both the employer’s portion and the employee’s portion. There is also interest.
• Employees can challenge the amount of hours worked or claim they never were paid for meal breaks or other breaks.
• Cash employees usually are not covered by workers’ compensation insurance. If an employee makes a Workers’ Compensation claim, the employer has to pay all damages. This can be financially ruinous.

No good things come from paying an employee in cash, only bad things. Many of them can ruin your business. Franchisees should never pay employees in cash.

Rule No. 2
Never Hire Undocumented Workers

During 2013, numerous franchises have been terminated by SEI because, among other things, they hired undocumented workers. In several recent cases, Federal judges have granted preliminary injunctions in favor of SEI terminating storeowners’ franchises without any right to cure, at least in part because the franchisees knowingly hired undocumented workers and used false social security numbers for employees who were not eligible to work in the United States.

Problems with hiring undocumented workers:
• Potential federal criminal liability: For example, Jose Calhelha, former owner of ten Connecticut Dunkin’ Donuts, pleaded guilty on December 29, 2007 to illegally encouraging aliens to come to the United States and illegally harboring aliens in Guilford Connecticut. In exchange for his plea, he was sentenced to serve ten months of imprisonment, followed by two years of supervised relief and fined one million dollars in monetary damage.
• Potential federal civil liability: Potential fines of thousands of dollars per undocumented worker.
• Potential loss of franchise: As noted above, SEI is very alert to the hiring of undocumented workers and recently has terminated franchises for this reason.

Do not hire undocumented workers. If you have any working for you now, terminate their employment immediately.

Rule No. 3
Have Employees Keep Track Of Their Own Time

Failure to have employees keep track of their own time, including all hours worked and overtime, causes numerous problems leading to employer liability to the employees.
• Employees must clock into and out of work every time they come into work, leave for lunch, return from lunch, or leave work at shift’s end.
• Employers must have time clocks or other means for hourly employees to keep track of their hours. 7-Eleven has a great system for employees to clock in and clock out on the computer. The computer reports the time directly to 7-Eleven for the calculation and payment of hourly wages, including overtime. All franchisees should be sure all of their employees use it themselves. Employees should clock in upon arriving to work, clock out for the meal break, clock back in after the meal break, and clock out at the end of his/her shift.
• It is essential that the employee inputs the time himself/herself, and not the franchisee. Franchisees should train all of their employees on the proper manner of clocking in and out on the computer at the time of hiring. Properly keeping track of their time must be one of the most important duties of each employee, and failure to properly clock in and out must be grounds for discipline—up to and including the termination of the employee.
• When an employee clocks in and out on the computer and a claim is brought by that employee, the franchisee can order the records from 7-Eleven, which are written documents showing the precise times the employee clocked in and out on the computer.
• When the employee signs in and out himself/herself either on the computer or a time clock, every time, the employee has created a good record of the actual time worked by the employee that will be believed by the Labor Commissioner and/or the courts.

Problems with not having employees clock into and out of work:
• Wage and hours claims before state labor boards or state courts are determined by time cards or other evidence of the employees’ clocking into and out of work.
• When employers (a) have not provided a time clock or computer sign in facility; (b) have failed to have the employee use the sign in facility; or (c) have signed in on behalf of the employees, the employer will lose the case.

Rule No. 4
Always Pay The Minimum Wage

Employers should know the federal minimum wage and their state’s minimum wage, and must pay the minimum wage to all workers.

Even though 7-Eleven sets these on their computer to prepare the paychecks for your employees, you are responsible for all issues related to employees, so you need to know the local laws and be sure the proper amount is being paid. Some states, counties, and cities have different minimum wage rates in excess of the federal rate.

The current federal minimum wage is $7.25. The current state minimum wages can be found at this webpage:

From time to time the franchisee should check that the proper wage is being paid because the franchisee is responsible to be sure the minimum wage is paid to his/her employees.

Problems with failure to pay the minimum wage:
• The employer will be liable to the employee for additional wage. If the hours worked are overtime, they will be at time and a half.
• There are additional penalties to the employer, including attorneys’ fees and costs.

Rule No. 5
Always Pay Overtime

All employees—with the exception of “exempt employees”—are entitled to be paid overtime. “Overtime” under federal law is all hours in excess of 40 hours per week. This term also has different meanings in different places. For example, in California overtime is more than 8 hours in a day or 40 hours in a week.

“Exempt” workers are not required to be paid hourly wages. The primary exemption is for store managers who may be executive employees, provided their primary duty (at least 50 percent) is in managing the enterprise or a department of the enterprise, customarily and regularly directing the work of two or more other employees, and being able to hire and fire or suggest changes in the status of other employees. Very often, managers are treated as salaried employees on the basis of this test:
• Is the worker paid a salary that is not subject to reduction due to the number of hours worked or the quality or quantity of the work performed?
• Is the worker paid at least $455 per week? In some states, this may be higher; for example, in California it is $640 per week.
• Is the worker’s primary duty to manage the company or a recognized department or subdivision of it?
• Does the worker’s primary duty include the regular management or supervision of two or more employees?
• Does the worker have authority to hire or fire other employees, or is he or she in a position where his or her suggestions as to hiring, firing, advancement, or other change of status of other employees are given particular weight?

Problems with failure to pay overtime:
• Employer must make up overtime pay and there may be additional penalties.
• Potential claims at labor board or in court.
• Attorneys’ fees and costs.

Rule No. 6
Always Give Rest Breaks

Many states require employers to give rest breaks; for example, a 15-minute paid break in the middle of each 4 hours of work. Franchisees should determine their state’s requirements and tell all employees upon hiring, from time to time, and in writing in a sign posted in a conspicuous place they are required to take these 15-minute rest breaks.

Problems with failure to give rest breaks:
• The penalty for each failure to give a rest break is an hour of compensation at the employee’s regular rate.
• Potential claims at labor board or in court.
• Attorneys’ fees and costs.

Rule No. 7
Always Give Meal Breaks

Many states require employers to give their workers meal breaks. Franchisees should determine their state’s requirements, insist that all of their employees take meal breaks when they are entitled to them, or to waive them in writing to take on-duty breaks if that is permitted by the state law.

For example, under California law, if the employee works more than five hours, he/she is entitled to a 30 minute unpaid off-duty meal break and the franchisee must give it unless the employee is working more than five (5) hours but less than six (6) hours, in which case the employee can agree he/she will not take a meal period. If the employee agrees, this agreement must provide that the employee can terminate the agreement at any time and should be in writing (do not rely on an oral agreement).

In the event the employee works more than ten (10) hours but less than twelve (12) hours, the employee is entitled to two meal breaks; however, the employee can agree he/she will not take the second meal period unless the first meal period was not taken. In the event an employee works more than twelve (12) hours, he/she shall be entitled to take a meal period while “on-duty” at the end of ten (10) hours, and shall be paid for the time of the meal period. Again, if the employee agrees not to take a second meal break, the agreement must provide that the employee can terminate the agreement at any time and should be in writing.

Unless the employee is relieved of all duty during a thirty (30) minute meal period, the meal period is considered to be “on-duty” and the employee is entitled to wages during the meal period. An “on-duty” meal period is permitted only when the nature of the work prevents the employee from taking an “off-duty” break, such as an employee working the “graveyard shift,” and when the parties agree in writing to an “on-duty” meal period. This written agreement must provide that the employee can revoke the “on-duty” agreement at any time. This agreement must be in writing. 7-Eleven provides a form for this purpose.

Problems with failure to give meal breaks:
• The penalty for each failure to give a rest break is an hour of compensation at the employee’s regular rate.
• Potential claims at labor board or in court.
• Attorneys’ fees and costs.

Rule No. 8
Keep Records Of All Exempt And Non-exempt Employees

With the exception of the I-9 and the W-4, the employer is not required to keep these records in any particular format, but they must generally include the following information:
• name of the employee;
• home address;
• date of birth, if the employee is under age nineteen;
• sex of the employee;
• occupation in which the employee is employed;
• day of the week and time at which the workweek begins;
• the regular hourly rate and the basis on which wages are paid;
• hours worked each day and week;
• daily or weekly straight time earnings;
• weekly overtime excess compensation;
• deductions from or additions to wages;
• wages paid each pay period, and the date wages are paid and the period covered by such payment; and,
• W-4 and I-9 for each employee.

Tip: Keep these records off-site. Employees sometimes steal records to destroy evidence for lawsuits against franchisees or those brought by franchisees. If requested records are off-site, you generally have 72 hours to provide them.

Franchisee Excuses For These Mistakes

There are many excuses for the failure to follow these simple but essential rules. Here are a few:
• He/she is my best employee, the most dedicated and hardworking.
• He/she says he/she needs the overtime, I can’t afford to pay time and a half, so he/she agreed to be paid straight time for overtime.
• He/she is like family.
• I paid for his/her hospitalization/kid to go to college/chemotherapy treatments/new car/rent deposit.
• He/she would never do anything against me.
• He/she personally signed all of his/her time cards.
• I cannot get my employees to clock in and out properly. I will have to fire them all!
• It’s so hard to get good employees.

Remember, no good deed goes unpunished! Often the employees to whom you have been the kindest are the ones who will go to the labor board or to court after termination to try to collect from you for violations of the laws relating to employment. Trust no one. Your kindness means nothing after the employment relationship ends. Follow the rules for every employee.

Finally, each state has different laws regulating employment. I recommend you check with a lawyer in your state with knowledge of its laws to be sure you are in compliance.