Industry Trends in the Law: “Anti-Poaching” Provisions
For years, franchise agreements contained a provision that prohibited one franchisee from hiring employees from other franchisees, unless all parties agreed. This provision is commonly referred to as an” anti-poaching” provision.
For franchise systems, the cost of training employees can be significant. Training a general manager to operate the franchise business is a significant investment that can take years. In order to protect that investment, franchise systems obtained the consent of the franchisees to not poach other franchisees’ employees.
In January 2018, Washington Attorney General Bob Ferguson, intrigued by the 2017 New York Times article entitled “Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue,” launched an investigation into the anti-poaching provisions in franchise agreements. The article suggested that the anti-poaching provisions placed downward pressure on employee wages. The article cited Princeton economists Alan Krueger and Orley Ashenfelter, who conducted research on some of the largest franchise systems and the correlating franchise agreements. Professors Krueger and Ashenfelter concluded that anti-poaching provisions reduce opportunities for low-wage workers and stagnate wages. Specifically, Professors Krueger and Ashenfelter examined franchise agreements for 156 of the largest franchise companies and found that virtually all of the franchise agreements “restrict[ed] the recruitment and hiring of employees from other units within the franchise company.”
Fueled by this research, in 2018, Washington AG Bob Ferguson negotiated an end to “anti-poaching” practices involving 46 franchise brands, including McDonald’s, Anytime Fitness, Sport Clips, and La Quinta. As of August 2019, a total of 66 franchise brands entered into agreements with the Washington attorney general to stop enforcement of anti-poaching provisions. During this 2-year investigation, only one franchise system, Jersey Mike’s, refused to stop enforcement of its anti-poaching provision. The Washington attorney general responded by filing a lawsuit against Jersey Mike’s, asserting that Jersey Mike’s violated antitrust provisions of Washington’s Consumer Protection Act through Jersey Mike’s use of the anti-poaching provision. A Washington state court refused to dismiss the AG’s complaint, which caused Jersey Mike’s to relent and enter into the same binding agreement to stop enforcement of its anti-poaching provisions.
Other states have joined the chorus. In July 2018, the attorney’s generals of California, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island sent letters to Arby’s, Burger King, Dunkin’ Donuts, Five Guys Burgers and Fries, Little Caesar’s, Panera Bread, Popeyes Louisiana Kitchen, and Wendy’s, demanding documents related to these franchisors’ use of anti-poaching provisions. In March 2018, Senators Elizabeth Warren and Cory Booker introduced the End Employer Collusion Act (S. 2480), legislation that proposed to outlaw anti-poaching provisions in franchise agreements.
In addition, at least four class action lawsuits have been filed against franchisors, including Carl’s Jr., McDonald’s, Pizza Hut, and Jimmy John’s. These class action cases allege that the anti-poaching provisions violate state and federal antitrust laws. A federal court in Illinois rejected McDonald’s motion to dismiss in Deslandes v. McDonald’s USA, LLC.
These cases will be closely monitored, but there are immediate action steps for franchise systems and other similar types of relationships. First, stop including in any contractual relationship a clause that appears to be an “anti-poaching” provision. Second, stop enforcing these “anti-poaching” provisions. Third, amend any existing contracts that include such a provision to eliminate it. Finally, ensure that there are no longer any “tacit” agreements between franchisees to agree not to hire employees from other franchisees.
These stories are yet another example of staying out of the sights of the government. When any governmental body sets its sights on your business or business practices, it could have wide-ranging effects. Here, the Washington attorney general began an investigation into anti-poaching provisions, and the issues expanded from Washington to nationwide, and includes presidential candidates using the subject as a campaign issue.
For franchise systems, the cost of training employees can be significant. Training a general manager to operate the franchise business is a significant investment that can take years. In order to protect that investment, franchise systems obtained the consent of the franchisees to not poach other franchisees’ employees.
In January 2018, Washington Attorney General Bob Ferguson, intrigued by the 2017 New York Times article entitled “Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue,” launched an investigation into the anti-poaching provisions in franchise agreements. The article suggested that the anti-poaching provisions placed downward pressure on employee wages. The article cited Princeton economists Alan Krueger and Orley Ashenfelter, who conducted research on some of the largest franchise systems and the correlating franchise agreements. Professors Krueger and Ashenfelter concluded that anti-poaching provisions reduce opportunities for low-wage workers and stagnate wages. Specifically, Professors Krueger and Ashenfelter examined franchise agreements for 156 of the largest franchise companies and found that virtually all of the franchise agreements “restrict[ed] the recruitment and hiring of employees from other units within the franchise company.”
Fueled by this research, in 2018, Washington AG Bob Ferguson negotiated an end to “anti-poaching” practices involving 46 franchise brands, including McDonald’s, Anytime Fitness, Sport Clips, and La Quinta. As of August 2019, a total of 66 franchise brands entered into agreements with the Washington attorney general to stop enforcement of anti-poaching provisions. During this 2-year investigation, only one franchise system, Jersey Mike’s, refused to stop enforcement of its anti-poaching provision. The Washington attorney general responded by filing a lawsuit against Jersey Mike’s, asserting that Jersey Mike’s violated antitrust provisions of Washington’s Consumer Protection Act through Jersey Mike’s use of the anti-poaching provision. A Washington state court refused to dismiss the AG’s complaint, which caused Jersey Mike’s to relent and enter into the same binding agreement to stop enforcement of its anti-poaching provisions.
Other states have joined the chorus. In July 2018, the attorney’s generals of California, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island sent letters to Arby’s, Burger King, Dunkin’ Donuts, Five Guys Burgers and Fries, Little Caesar’s, Panera Bread, Popeyes Louisiana Kitchen, and Wendy’s, demanding documents related to these franchisors’ use of anti-poaching provisions. In March 2018, Senators Elizabeth Warren and Cory Booker introduced the End Employer Collusion Act (S. 2480), legislation that proposed to outlaw anti-poaching provisions in franchise agreements.
In addition, at least four class action lawsuits have been filed against franchisors, including Carl’s Jr., McDonald’s, Pizza Hut, and Jimmy John’s. These class action cases allege that the anti-poaching provisions violate state and federal antitrust laws. A federal court in Illinois rejected McDonald’s motion to dismiss in Deslandes v. McDonald’s USA, LLC.
These cases will be closely monitored, but there are immediate action steps for franchise systems and other similar types of relationships. First, stop including in any contractual relationship a clause that appears to be an “anti-poaching” provision. Second, stop enforcing these “anti-poaching” provisions. Third, amend any existing contracts that include such a provision to eliminate it. Finally, ensure that there are no longer any “tacit” agreements between franchisees to agree not to hire employees from other franchisees.
These stories are yet another example of staying out of the sights of the government. When any governmental body sets its sights on your business or business practices, it could have wide-ranging effects. Here, the Washington attorney general began an investigation into anti-poaching provisions, and the issues expanded from Washington to nationwide, and includes presidential candidates using the subject as a campaign issue.
