News Briefs

“While it was disappointing the California bill did not clear the second committee, we must step back and look at what has changed,” said Misty Chally, executive director of the Coalition of Franchisee Associations. “The industry has taken notice, and at franchise conferences, the topic of a more balanced environment is a major point of discussion. For the industry to be strong, franchisees must invest. With franchise agreements continuing to be more one-sided in favor of the franchisors, many of the most qualified franchisees aren't investing.

“We must remember that it is the franchisees who invest in and are the job creators in our local communities. This is an important message to our government representatives, and legislation to create balance will give more incentive to invest,” she said. “The CFA is encouraged by the support of the franchisees and feels that this is the beginning of a major change in the industry that will in the long run strengthen franchising.”

Labor Department Slaps Tampa, FL, Subway Franchisee

In April, the U.S. District Court for the Middle District of Florida, Tampa Division, ordered a Tampa, FL, Subway franchisee to pay 122 employees a total of $7,536 in minimum back wages, plus $3,768 in liquidated damages (Solis v. Franchise Equity Group Inc., Civil action file number: 8:12-cv-00527-RAL-EAJ). The judgment resolves a lawsuit filed by the U.S. Department of Labor against Franchise Equity Group Inc., which has 29 Subway franchises in the Tampa area.

According to a press statement issued by DOL, the franchisor violated the minimum wage rules of the Fair Labor Standards Act by not paying employees for work hours spent taking mandatory Subway Sandwich Artist Certification training courses. “The Wage and Hour Division is continuing its restaurant enforcement initiative throughout Florida to make sure employees of both full-service and limited-service restaurants receive their full pay, and that employers who follow the law do not have to face unfair competition from those who ignore it,” said James Schmidt, director of the Tampa District Office of DOL's Wage and Hour Division, which conducted the investigation.

Justice Department Seeks to Shut Down Tax Prep Franchisor

The U.S. Department of Justice has filed civil injunction lawsuits in five cities, seeking to shut down franchisor Instant Tax Service (“ITS”) and its franchisees. Justice alleged in complaints that ITS Financial LLC, based in Dayton, OH, deliberately ignored systemic and pervasive fraud by ITS franchisees. The company, owned by Fesum Ogbazion, claims to be the nation's fourth-largest tax preparation company.

The complaints allege that ITS franchisees across the country intentionally prepare and file fraudulent tax returns to maximize their customers' refunds. The customers, who are not aware of the fraud, have come to ITS for refund-anticipation loans, which have high fees and interest rates. The alleged frauds may include fabricated deductions and claims of bogus dependents on one end of the scale, but they also may include claims of higher income in order to maximize earned-income tax credits. “ITS Financial and ITS franchisees can extract large tax preparation fees, as well as various charges that Ogbazion refers to as 'junk fees,' directly from their customers' refund checks,” according to the complaint. The fees, which have run as high as $1,000 for preparing tax returns in as little as 15 minutes, often are not disclosed to customers.

Lawsuits were filed in March in federal courts in Dayton, Chicago, Indianapolis, Las Vegas, and Kansas City, KS. The franchisees named in the lawsuits own more than 60 tax-prep stores and kiosks.

In May, Ogbazion filed a response to the lawsuits, challenging the government's claims that he was aware of fraud by franchisees but took no meaningful steps to stop it. He also disputed the government's claim that he is responsible for the conduct of his franchisees, arguing in the filing that “franchisees of Instant Tax Service were not under the control of defendants, and defendants are not responsible for any wrongful conduct, if any, committed by such franchisees.”

Complaints against ITS franchisees have been around for several years. The Justice Department has successfully criminally prosecuted four individual tax return preparers affiliated with ITS franchises in Ohio and Missouri. The Better Business Bureau said that it has received more than 900 complaints against ITS franchisees in the last few years.

California Committee Quashes Franchisee Bill

The Level Playing Field for Small Businesses Act of 2012 (AB 2305) is dead for now, as the Business, Professions and Consumer Protections Committee of the California Assembly failed to pass it on April 24. The bill garnered four votes in favor, three against, and two abstentions, but it needed five votes to be moved to another Assembly committee. The bill cannot be considered again in the 2012 legislative session.

The bill was introduced with a great deal of publicity, and numerous franchisees and franchisee associations testified in favor of it (see FBLA, May 2012). But franchisors argued that the bill was an overreach and that it contained many undefined terms that could reduce the attractiveness of franchising in California and could result in significant increases in litigation.

“While it was disappointing the California bill did not clear the second committee, we must step back and look at what has changed,” said Misty Chally, executive director of the Coalition of Franchisee Associations. “The industry has taken notice, and at franchise conferences, the topic of a more balanced environment is a major point of discussion. For the industry to be strong, franchisees must invest. With franchise agreements continuing to be more one-sided in favor of the franchisors, many of the most qualified franchisees aren't investing.

“We must remember that it is the franchisees who invest in and are the job creators in our local communities. This is an important message to our government representatives, and legislation to create balance will give more incentive to invest,” she said. “The CFA is encouraged by the support of the franchisees and feels that this is the beginning of a major change in the industry that will in the long run strengthen franchising.”

Labor Department Slaps Tampa, FL, Subway Franchisee

In April, the U.S. District Court for the Middle District of Florida, Tampa Division, ordered a Tampa, FL, Subway franchisee to pay 122 employees a total of $7,536 in minimum back wages, plus $3,768 in liquidated damages (Solis v. Franchise Equity Group Inc., Civil action file number: 8:12-cv-00527-RAL-EAJ). The judgment resolves a lawsuit filed by the U.S. Department of Labor against Franchise Equity Group Inc., which has 29 Subway franchises in the Tampa area.

According to a press statement issued by DOL, the franchisor violated the minimum wage rules of the Fair Labor Standards Act by not paying employees for work hours spent taking mandatory Subway Sandwich Artist Certification training courses. “The Wage and Hour Division is continuing its restaurant enforcement initiative throughout Florida to make sure employees of both full-service and limited-service restaurants receive their full pay, and that employers who follow the law do not have to face unfair competition from those who ignore it,” said James Schmidt, director of the Tampa District Office of DOL's Wage and Hour Division, which conducted the investigation.

Justice Department Seeks to Shut Down Tax Prep Franchisor

The U.S. Department of Justice has filed civil injunction lawsuits in five cities, seeking to shut down franchisor Instant Tax Service (“ITS”) and its franchisees. Justice alleged in complaints that ITS Financial LLC, based in Dayton, OH, deliberately ignored systemic and pervasive fraud by ITS franchisees. The company, owned by Fesum Ogbazion, claims to be the nation's fourth-largest tax preparation company.

The complaints allege that ITS franchisees across the country intentionally prepare and file fraudulent tax returns to maximize their customers' refunds. The customers, who are not aware of the fraud, have come to ITS for refund-anticipation loans, which have high fees and interest rates. The alleged frauds may include fabricated deductions and claims of bogus dependents on one end of the scale, but they also may include claims of higher income in order to maximize earned-income tax credits. “ITS Financial and ITS franchisees can extract large tax preparation fees, as well as various charges that Ogbazion refers to as 'junk fees,' directly from their customers' refund checks,” according to the complaint. The fees, which have run as high as $1,000 for preparing tax returns in as little as 15 minutes, often are not disclosed to customers.

Lawsuits were filed in March in federal courts in Dayton, Chicago, Indianapolis, Las Vegas, and Kansas City, KS. The franchisees named in the lawsuits own more than 60 tax-prep stores and kiosks.

In May, Ogbazion filed a response to the lawsuits, challenging the government's claims that he was aware of fraud by franchisees but took no meaningful steps to stop it. He also disputed the government's claim that he is responsible for the conduct of his franchisees, arguing in the filing that “franchisees of Instant Tax Service were not under the control of defendants, and defendants are not responsible for any wrongful conduct, if any, committed by such franchisees.”

Complaints against ITS franchisees have been around for several years. The Justice Department has successfully criminally prosecuted four individual tax return preparers affiliated with ITS franchises in Ohio and Missouri. The Better Business Bureau said that it has received more than 900 complaints against ITS franchisees in the last few years.