Uncle Sam audits tax payers, but how about Franchisors auditing franchisees? Most franchise agreements grant the franchisor the right to audit a franchisee, but franchisor auditing practices can go awry because of franchise laws and implied obligations of good faith and fair dealing.

Every franchise contract requires that the franchisee and franchisor to act fairly. Audit programs that select franchisees for audit arbitrarily or based on improper reasons can be seen as unfair and legally actionable. Selecting a franchisee for audit based a franchisee’s attempt to spear head system discord, repeated auditing of the same franchisee, or auditing a franchisee based on an unrelated dispute, along with many other select practices may be viewed as unfair and legally actionable.

Another area of concern is how audit concerns are addressed. Whether by statues, regulations, or common law, many states prohibit the discriminatory treatment of franchisees. Franchisors are not permitted to treat franchisees differently unless there is a legitimate reason to do so. Thereby if short falls are uncovered in audits of two franchisees, the franchisor’s response must be the same in both cases unless the franchisor can show a proper rationale for differing responses. A proper rationale may be the amount of the short fall; the underlying cause of the short fall whether it is administrative error or intentional omission; or the franchisee’s actions to correct the short fall.

A Post from the Field: Franchisor Audit Programs, Cautions and Best Practices.

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