Caltex Reacquisition Model

Franchise giant Caltex is re-franchising stores in order to meet government regulator’s demands to put an end to the ongoing employee wage fraud scandal. During a recent Caltex franchisor/franchisee convention in Japan, franchisees were put on notice that franchise agreements that were to expire within the next year would be offered only short-term extensions, not the 5-10 year contracts that they expected. To date, Caltex has terminated the franchise agreements of over 100 stores and re-acquired over 1 billion dollars of store assets at little or no cost to the company.

The company is auditing stores where employees have complained that they were paid below minimum wage or were paid normally only to be required to kick back cash to the franchise owner. Immigrants were the target of the franchisee scheme and the franchisee was often an immigrant of the same country. Low-income immigrant workers were threatened with being fired from their jobs if they did not comply as well as deportation and their relatives back home were threatened with physical harm. Regulators accuse franchisees of taking advantage of low-income immigrant workers who are easily the target of coercion and intimidation. Most immigrant workers at these Caltex locations are unaware of their rights and are being exploited for the gains of unscrupulous store owners.

Caltex has been given time by regulators to investigate and put an end to the employee wage fraud accusations internally before the government steps in with more stringent regulations and penalties. The company’s strategy is to audit franchisees and then terminate franchise agreements with franchisees that are found to have violated the law, as is their right to do so, as laid out in the company franchise agreement. In addition to self-policing franchisees accused of employee wage fraud, the company is reviewing every detail of the franchise agreement. Franchisees accused of underpaying wages have complained that without doing so they could not stay in business and that the franchise agreement with its fees and expensive inventory requirements were the problem.

While franchise wage fraud affects only a small percentage of the Caltex network of franchisees, the uncertainty of future operations at Caltex has driven down the price of existing Caltex gas station/convenience stores by around 50% and those wishing to sell now face financial ruin. To date, around half of the company’s network of franchises have undergone the mandatory employee wage audit and Caltex has re-acquired over 100 stores, many of which refused the company attempt to more closely scrutinize their wage payment practices. Some franchisees have gone deeply into personal debt with hundreds of thousands of dollars and franchisees accuse the company of using the wage fraud crisis to require the stores, leaving the Caltex franchisee in debt and financial ruin.

In addition to self-policing and re-acquiring locations found to have violated their franchise agreement, Caltex is even considering whether or not the franchise model of converting gas stations into convenient shopping stores is even viable and whether it might be a better idea to go the corporate route of store ownership.