Franchise No-Poaching Clauses Under Review

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‘No-poaching’ clauses—the practice by which franchisors require franchisees to not hire employees from other franchisees of the same franchise brand—have been in the spotlight lately as franchise operators are reevaluating the usefulness of the provision in their franchise agreements.

The widespread reevaluation of the practice, which is similar to a non-compete agreement used in other industries, was spurred by an academic paper released in September 2017, done by economist Alan Krueger of Princeton University and Professor Eric Posner of the University of Chicago Law School.

Analysis of data provided for the study by franchise market research firm FRANdata led to the finding that approximately 56% of franchises with over 500 U.S. units are using the clause. When only considering quick service—aka fast food—franchises, the number jumps to approximately 80%. The study also showed a near 50% increase in the use of no-poaching clauses among the termed “major franchisers” over the last 20 years.

As part of a general look at the national economy, specifically the “puzzle” of why wage growth in the U.S. is “surprisingly sluggish,” the pair found that “These contractual devices give the employers more power to suppress wages…Despite the booming labor market, there hasn’t been an increase in wages as you’d expect.”

Part of the problem, as asserted by the paper, is that employees caught under these guidelines can’t use their earned skills to seek better wages at another place where that skill set is already valued because hiring them is against the rules. No-poaching provisions also largely prohibit workers from seeking, or receiving, raises at their current workplace because, without the threat of competition, there is lessened incentive for the employer.

In turn, this setup leads to increased turnover, as the current workers leave for different franchise brands and for different industries altogether, as well as wage stagnation, as the replacements often are less skilled than the previous workers leading employers to pay them a lesser wage.

These are the primary reasons legislators are also reviewing the practice. Eleven states—including Washington, Illinois and Massachusetts—have commenced investigations into no-poaching clauses, especially as it pertains to antitrust provisions.

“No-poach agreements trap workers in low-wage jobs and limit their ability to seek promotion into higher-paying positions within the same chain of restaurants,” Illinois Attorney General Lisa Madigan said in a news release. “I am investigating this practice because it unfairly stops low-income workers from advancing and depresses their wages.” The Illinois Attorney General’s Office previously negotiated a settlement with Jimmy John’s in December 2016 for what it called “highly restrictive non-compete agreements.”

Recently, documents about franchise agreements and poaching-specific company communications have been requested by state governments for review from at least eight fast food chains: Arby’s, Burger King, Dunkin’ Donuts, Five Guys Burgers and Fries, Little Caesars, Panera Bread, Popeyes Louisiana Kitchen, and Wendy’s. It should be noted, however, not all of these franchises use the clause. Of the brands asked, Dunkin’ Donuts and Wendy’s have gone on the record denying the use of the clause in their franchise agreements.

Aiming to be proactive and get in front of any official rulings, many U.S. franchises have initiated internal reviews of their practices. As of mid-August 2018, no less than 10 franchises (Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Church’s Chicken, Cinnabon, Jimmy John’s, Little Caesars, McDonald’s and Sonic) had already gone as far as to drop the no-poaching clause from their agreements citing concerns that the practice could be a contributor to stifling wages and discouraging the best talent from staying with their brands.

The dropping of the no-poaching clause by franchises also dovetails with the long-going National Labor Relations Board (NLRB) investigation into the nature of the franchisor-franchisee relationship.

For instance, Dunkin’ Brands, parent company of Dunkin’ Donuts and Baskin-Robbins, released a statement addressing the recent legal inquires, which in part reads, “All Dunkin’ Donuts restaurants are independently-owned and operated by individual franchisees, independent business owners solely responsible for running their day-to-day operations, including all employment decisions. As a franchiser, we are not in a position to intercede in franchisees’ employment matters.”

The verbiage appears directly influenced by the NLRB’s investigation to whether or not franchisors are ‘joint employers’ of the employees at individual franchise locations—a designation that has massive implications for liability matters.