Can you grant a franchise to an “illegal alien”?

June 19th, 2014

Today the CEO of an residential services company (handyman, cleaning, etc.) posted the following question on the American Bar Association’s Forum on Franchising’s email LISTSERV:

“What are the laws regarding licensing franchises to illegal aliens? What other considerations need to be reviewed before taking such a step?”

I was so facinated by his question that I spent some time looking into it myself.   My conclusions were as follows:

Based on my brief Internet research there is not any obvious legal restriction, generally, on doing business with people who do not have a legal immigration status.  However, a couple of concerns come to mind:

  1. Is it conceivable that the franchisee could be considered the franchisor’s employee, in any sense?  Government agencies have been aggressive in challenging independent contractor classifications in a variety of areas, so if the franchise owner actually provides a lot of the services offered in a business (such as cleaning or home renovations) then it is not hard to imagine ICE taking the position that they are “employees in disguise” and that a franchisor that knowingly recruits such a person is violating the employment-based restrictions on hiring “illegal aliens”.
  2. If you know that a person is in the country illegally, then arguably you have a duty under the various franchise disclosure laws to inform the person that he or her illegal status may result in loss of the entire investment in the business.  In particular, because the franchisee has to comply with all laws, including obtaining a legitimate tax identification number and paying income taxes, if the franchisee cannot obtain a tax ID number due to lack of immigration status then compliance with the franchise agreement is impossible.
  3. If the franchisor grants a franchise to someone knowing that, due to immigration status, he or she will have to avoid paying taxes, then isn’t the franchisor participating in tax evasion (or at least “aiding and abetting”)?   This would a particularly precarious position for the franchisor if it is at all involved in billing and collection from customers and then remitting net proceeds (after royalties) to the franchisee, since the franchisor is then actively involved in handling funds that it knows are not being reported to the IRS.
  4. If the franchisee cannot obtain an employer ID number because he or she doesn’t have a social security number, then the franchisee won’t be able to comply with the employment laws in hiring workers.  Franchisee probably would try to get around this by hiring “independent contractors” and paying them in cash, since this franchisee isn’t reporting taxes anyway.  If the franchisor knows about all of this and lets it go on indefinitely, wouldn’t a plaintiffs’ lawyer pursuing a class-action misclassification case (like in the Coverall case) come after the franchisor too, as “joint employer”?

In short, the potential derivative liability for the franchisor in this scenario is daunting.  I suppose that, if your franchise system is simple and low-cost and is attractive to immigrants, you would be best off just not asking for a social security number or any other information that could reveal a prospect’s immigration status.  If you don’t have actual knowledge or a reason to know about the person’s status, then it seems like the risk would be vastly reduced – particularly if the franchisee is simply paying a flat periodic fee and the franchisor has little involvement in the details of the franchisee’s operation.

Bottom line:  In this scenario it is the franchisee’s responsibility to comply with immigration laws, and in the U.S. an undocumented person is taking a significant risk investing in a franchise (or any other business).  However, as shown above, if you are franchising a business of any substantial cost or complexity, it is probably in your best interests to avoid granting franchises to a person who lives in the U.S. but cannot demonstrate a legal right to do so.

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