My Franchise Story: How Dunkin' Used Conflict and Intimidation with My Employee

Editor's note: A franchisee recalls how Dunkin' Donuts tried to intimidate his employee to the point of tears to shake out information that could result in the termination of his store. He has agreed to an edit and reformatting of his original comment posted under an article to be published as a column. Such letters from aggrieved owners in various franchise systems will be published under this column, Forlorn Franchisee, from time to time. The writer's name has been withheld by request. 

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I am a franchise owner that Dunkin’ Donuts is trying to get rid of. Here is my story and the tactics of the Loss Prevention Department of Dunkin' Brands in assuming guilty until proven innocent or until you go bankrupt.

My partner and I joined the Dunkin' Donuts system by signing a three unit store development agreement.

The first 18 months was brutal. There were times, sometimes months at a time, where we could not afford our payroll. So my partner and I would send our employees home and work the counter until either 11PM or 12AM when our overnight crew checked in. Every Dunkin' mom-and-pop operator knows what it is like to sleep on a 50 lb bag of flour. It’s actually not that bad, especially when motivated by the thought that store failure is not an option.

After a couple of years, we opened our second store and felt the relief of a successful opening. With that, my partner and I began drawing a minimal $500 per week in salary. Two years later, we opened our third store with greater success compared to store #2. Finally, we starting to see and feel the fruits of our labor come to life.

We signed another three unit SDA. Our fourth store was developed exactly one mile away from another franchisee’s store, who took offense. During that time, DD Loss Prevention somehow received a tip that our organization was paying cash to employees. They acted on the information and we were "randomly" selected for a Loss Prevention Audit the same year.

The first interview with Loss Prevention occurred two months after we delivered, in entirety, including some original files, the documents that were requested. What I thought was going to be a friendly business review followed by discussion was actually a strong handed attempt to find anything, even if immaterial, to support the anonymous tip received.

A Visit from Loss Prevention

An individual from Loss Prevention visited us. He slammed his hand down in my store’s dining area, saying, “We have all the information we need at this point but we’d like to hear it from you personally. How is it that you get the cash to pay your employees?”

He had my manager’s W-2 in his hand and continued, “The average Dunkin' Donuts manager makes $40K plus per year. How is it that your manager can make a living earning only $29K per year?”

I replied, “Before answering that question, I would like you to ask me first – Did this individual work the entire year? The answer will be no. Now, to answer the second part, he was away for three months during the year at which time he had gone to India to marry his wife. If you annualize his salary, the numbers will show a salary of approximately $39K. In addition, I provide him with a SUV, cell phone, life insurance, and a gifted ticket to India.”

With that said his tone became friendlier and asked some other questions trying to figure out this grand scheme that had no basis. I run a clean shop operationally and financially bottom line.

An Interview of Conflict and Intimidation

Four months later, the same individual from Loss Prevention (LP) requested to meet with one of our other managers in a different store.

In order to operate the store, effectively, it is business critical for the manager to live within a close proximity. After consulting with our CPA, we decided to include, as a convenience to the employer, a leased apartment facility for the primary store manager. Regardless of whether or not the manager occupies the leased apartment has no bearing on the individuals pay. It is treated as a general business expense as a convenience to the employer.

The store manager (SM) being questioned had an annual salary of roughly $41K. The conversation was more to the point this time around.

LP - “Who pays for your apartment?”
SM - “Boss pays.”
LP – “Do you have to repay him?”
SM – “Boss has done a lot for me and I owe him a lot.”
LP – “Meaning, for the apartment.”
SM – “Yes.”
LP – “Do you know it’s against the law to have your boss pay for an apartment without paying taxes on it? Do you pay taxes on your income?”
SM – 1st part “No.” 2nd part “Yes.”
LP – “No, you do not pay taxes on all of your income because your boss does not give you a 1099 for the apartment. What do you do with the cash that your boss gives you?”
SM – “I deposit my check in the bank.”
LP – “I don’t think you’d deposit all of the cash in the bank. If so, I want you to go home right now and get me your bank statements. Otherwise, you are also going to get in trouble with your Boss.”

Although the above conversation is not verbatim, it does provide a general description of the tactics used during the conversation. It is my assumption from the manner in which the questions were being asked that all conversations with Loss Prevention were recorded by the individual handling the case. However, it has not been confirmed to date.

At that point, my store manager wasn’t sure how to handle the questions and started tearing, thinking he had done something wrong. Not being able to respond any further, LP excused my store manager by saying he’s going to ask his boss the same thing and that the bank statements may still be requested.

Once again, they had nothing to go on.

Happy Again with Plans of Future Development

The next year I had presented a development plan to Dunkin's development team demonstrating, in detail, that if fully executed would have positioned our organization as a 12 store network within an exclusive 15 square mile radius, creating significant value-added synergies.

After the presentation, I was given numerous “pats on the back” with one particular comment that stuck with me made by the Regional Director of Development, “I wish all franchisee’s thought about development the way you do. What they need to understand, is we are going to penetrate the markets. And if you don’t do it, someone else will.”

We began executing on our plan, within two weeks of the meeting after securing the necessary financial commitments, by issuing a Letter of Intent to acquire two stores. The LOI was sent to Dunkin', by the selling franchisee, for review and acceptance. The selling franchisee was also under a lawsuit with Dunkin' at the time. I was expecting their approval of the acquisition, based on the positive presentation and being an integral piece of our strategy.

The Termination Letter

Instead, I was delivered a termination letter to cease operations within 30 days. Loss Prevention alleges that we underreported gross sales since our bank account showed $1.7 million in deposits while store gross sales were recorded at only $1.2 million.

I say no way!

The difference was reconciled to the penny within minutes during the second interview with Loss Prevention.

They also didn't like payment in lieu of compensation for expenses of an SUV lease given to a key associate, expenses for a residential apartment lease, and a tuition payment made to a cousin for a business operation model she built for our firm.

Hitting us for breach of contract for not obeying all laws has nothing to do with protecting the integrity of the brand. In my view, it’s about a den of thieves who hawked our books to uncover the value of our business.

Since receiving the termination letter, Dunkin' is holding up the development of my fifth store that was in process when we were “terminated". Having secured the property, I am bearing the holding cost of the rent as an ongoing expense.

We went from “A” rated operators to “C” rated overnight with no indication of this coming. Their audit lasted over one year and now we have been in litigation for a long time. Our firm has not been able to move forward while absorbing on-going legal cost on top of increasing operating expenses.

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Editor's note: One attorney has sent Blue MauMau a copy of the Hatt case (see Hatt v Commissioner Issue 4, see the same number for Issue, Presented and then Opinion). This case illustrates the difficulty of declaring that an employer's payment for an apartment constitutes "income" to an employee. The Internal Revenue Service has  battled back and forth on this issue.