No-Poach Agreement Investigations: What Businesses Need to Know
In January 2018, Washington State Attorney General Bob Ferguson, launched investigations into several fast food chains utilizing no-poach agreements between franchisees as violative of antitrust laws. These agreements prevented employers within the same franchise chain from soliciting employees to work in another location for higher pay or increased benefits. The agreements could also follow employees for up to six months after the termination of their employment, during which time franchisees within the same chain could refuse to hire the employees. Employees were often unaware that a no-poach agreement was in effect since the agreements existed at the corporate level and did not appear in the individual employment contracts or information. The agreements were between franchise owners and were enabled by the chains’ corporate policies to keep wages lower and experienced employees where they were currently employed.
No-poach agreements, much like non-compete agreements, help protect an employer’s investment in its employees. The difference is that a no-poach agreement, hypothetically, will allow an employee to move from an Arby’s location to McDonald’s, but not from one Arby’s location to another. A non-compete agreement, however, would allow an employee to move from one Arby’s location to another, but would prohibit movement within a certain area and for a set duration between different competing companies. When used together, the agreements have the potential to severely limit a low-wage employee’s job prospects after leaving his or her employer.
Attorney General Ferguson’s investigation was initially limited to fast food restaurants where no-poach agreements like these are common. According to Attorney General Ferguson’s office, the investigation resulted in more than thirty restaurant chains (including commonly known chains such as Applebee’s, Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Church’s Chicken, Cinnabon, Five Guys, IHOP, Jamba Juice, Jimmy John’s, Little Caesars, McDonald’s, Panera, and Sonic, among others) agreeing to remove no-poach provisions from their franchise agreements nationwide. Only two chains—Quiznos and Jersey Mike’s Subs—refused to remove the agreements from their contracts. Ferguson followed up with lawsuits against the chains, alleging that the agreements are a per se violation of the antitrust provisions contained in Washington state consumer protection laws.
As Attorney General Ferguson broadened his investigations beyond fast food chains to hotels, car repair services, home health care services, cleaning services, convenience stores, tax preparation services, parcel services, child care, travel services, and insurance adjustor services, other states have been taking notice. By mid-summer, a coalition of attorneys general from ten states, including Pennsylvania, sent letters to eight national fast food chains requesting information regarding their franchise agreements, specifically looking for no-poach clauses. In fact, Pennsylvania Attorney General Josh Shapiro wrote about the issue in a Labor Day publication, vowing to crack down on these types of agreements restricting low-wage workers.
Former employees are also taking notice. Lawsuits have been filed against franchise-based fast food companies including Burger King, Jimmy John’s, Domino’s, and McDonald’s alleging violations of antitrust laws. The courts are willing to listen as well. A Northern District Court in Illinois has denied McDonald’s preliminary attempts to have a case filed against it dismissed after finding evidence of anti-competitive behavior. That case remains pending.
In contrast to properly drafted non-compete agreements where the employer has a valid protectable interest,[1] no-poach agreements are almost always unsustainable. It is difficult for employers within the same franchise to argue any protectable interest in preventing a trained employee from moving from one franchise location to another. Objectively, hiring from another franchisee should be advantageous since the employee comes with built-in experience, but there seems to be a more nefarious thought process at work.
According to the attorneys general investigating these agreements, the only reason for no-poach agreements is to prevent competitive wages within and among franchise locations. If an employee is unable to leverage his or her experience with one franchise location, he or she cannot command a higher wage which ordinarily accompanies more experience. Wages then stagnate, and an employee has little opportunity for wage enhancement across franchise locations despite his or her years of experience.
Any employers—including those outside of fast food chains—with no-poach agreements in effect should carefully consider whether maintaining these generally unsupportable prohibitions is worth the risk.
This article was written with contribution from Sarah Rothermel, 3rd year law student at Widener Law Commonwealth.
[1] https://www.nssh.com/2018/09/freedom-to-work-as-it-affects-the-employers-freedom-to-contract/