Many franchisors utilize so-called “no-poach” clauses in their franchise agreements, and such clauses may be structured in a way that limits a franchisee’s ability to hire employees of other, same-brand franchisees and/or employees of the franchisor. Recently, a group of state attorneys general and prominent legislators began pressing franchisors to cease use of so-called “no-poach” clauses, particularly those that prevent lateral job mobility between same-brand franchisee employers.
In July 2018, attorneys general for Massachusetts, California, Illinois, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island and the District of Columbia, issued a joint letter request to Massachusetts-based Dunkin’ Brands, as well as Panera Bread, Arby’s, Burger King. Five Guys Burgers and Fries, Little Caesars, Popeyes Louisiana Kitchen, and Wendy’s. The letter contended that “no-poach” clauses (otherwise referred to as “employee non-competition,” “no solicitation,” “no hire” or “no switching” clauses) impact the mobility of workers employed by such franchise systems and thereby “restrict employees’ ability to improve their earning potential and the economic security of their families.” The attorneys general accordingly requested that the aforementioned franchisors provide copies of their franchise agreements and the rationale for the use of such clauses in those agreements.
In a separate letter to dozens of U.S.-based franchisors in July 2018, United States Senators Elizabeth Warren (D-Mass) and Cory Booker (D-NJ) issued a parallel request seeking similar information from franchisors. In their letters, Warren and Booker observed that “58 percent of major franchisors’ franchise agreements include a no-poach provision that prohibits their franchisees from hiring each other’s workers. Use of these provisions … now covers approximately 340,000 franchise units and millions of low-wage workers.”
Warren and Booker also introduced a Senate bill known as the End Employer Collusion Act to curb the use of no-poach clauses in franchise agreements. In support of the bill, Booker said, “Just as companies can’t collude to fix prices, franchises shouldn’t be allowed to collude to suppress their workers’ wages. Our bill would crack down on this exploitative practice by banning companies from using ‘no-poach’ agreements in contracts and franchise agreements.”
While The Washington Post wrote earlier this year that the bill is, in effect, “dead on arrival in a Republican Congress,” the current government inquiries seem to have prompted many franchisors to agree to discontinue use of such no-poach clauses. McDonald’s announced that it will neither enforce the no-poach clauses found in its current franchise agreements nor include no-poach clauses in contracts with new franchises. Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Cinnabon, and Jimmy John’s have since followed suit.
Dunkin’ Brands told The New York Times it does not restrict hiring amongst franchisees, but paragraph 7.0.6 of the 2018 Dunkin’ franchise agreement says, “Neither party will, during the term of this Agreement, directly or indirectly solicit or employ any person who is employed by the other or any of their affiliated companies.”
At a minimum, the language of this passage would seem to bar a Dunkin’ franchisee from hiring people working for Dunkin’ Brands. Because the phrase, “affiliated companies,” is not contractually defined in the Dunkin’ franchise agreement, it is unclear whether this contractual passage could be interpreted to bar a franchisee from hiring from another Dunkin’ franchisee.
Ultimately, franchisors and franchisees have a shared interest in clearly crafting any no-poach clause to avoid a circumstance in which their franchise agreements could be characterized as a conspiracy in potential violation of antitrust law. As recently discussed in Butler v. Jimmy John’s Franchise LLC, 2018 WL 3631577, *6 (S.D. Ill., July 31, 2018), an aggrieved franchisee employee could conceivably take the position that a franchisor’s no-poach clause functionally operates to create a horizontal agreement between the franchisor and its same-brand franchisees competitors not to hire one another’s employees in violation of the Sherman Act.
Historically, no-poach clauses faced relatively little antitrust scrutiny, but some franchisors have still elected to abandon the use of no-poach clauses altogether, rather than continuing to defend their use in the current regulatory climate.
John Holland is a partner at Dady & Gardner, a firm specializing in franchise law.