What to do? Franchisees Charged with Illegal Acts.

Image from http://morguefile.com

Image from http://morguefile.com


Franchisees, the franchisor, and other franchisees within a franchise system are inexplicably associated with one another.  The acts of one or a couple of franchisees can adversely impact the goodwill and reputation of the brand, the franchisor, and other franchisees within a system.  Wrongdoings by franchisees can lead to the franchisor and other franchisees fighting off unwanted liabilities.  Often times if a franchisee is sued, the franchisor will be named too in hopes that the franchisor can be tied in some indirect tangential way.  It can also lead to copycat allegations and heighten scrutiny of other franchisees in the franchise system.  All around it is bad news for the system.


So how does a franchisor respond when a franchisee is charged with a wrongdoing?  Liberty Tax has taken the route of disassociating itself and the franchise system from the accused franchisees.  The accused franchisees in South Carolina were called out by federal prosecutors for allegedly preparing false and inflated tax returns by entering inflated business income, expenses, and bogus dependents.  In response to the lawsuit filed by federal prosecutors, Liberty Tax’s Chief Compliance Offer asserted that:


Liberty Tax has a robust compliance program, and we expect our franchisees to make sure that their offices comply with all federal and state tax requirements.  Monday’s allegations appear to be limited to a small number of independently-owned franchised offices and prior year returns. We will take appropriate action after completing a review of both current year and prior operations at these offices.

Note in the Liberty Tax’s statement, there is no promise to close or terminate the franchise agreements of the accused franchisees.  Instead the statement attempts to protect the brand and other franchisees by saying that the South Carolina franchisees are outliners in the system.  Other franchisees did not commit the same wrongful acts.


There is good reason why Liberty Tax did not say they are terminating the franchisees.  Remember, in America, everyone is innocent until proven guilty.  While the knee jerk reaction, may be to terminate the franchisee, hast can lead to wrongful termination lawsuits by franchisees.   Liberty Tax had two choices: [1] wait till the lawsuit plays out in the courts to see  if the allegations are affirmed or [2] find affirmative evidence of wrongdoing that is ground for termination.  Liberty Tax has said it will go for number 2.  Again, wise decision.  Court cases can take years to resolve.


When faced with a situation of the franchisee’s alleged illegal or improper acts, it is important to take a step back and follow the proper channels.  At the end of the day, what if the franchise agreement is terminated and the franchisee is cleared of wrongdoing?


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