In many systems, franchise agreements contain “no-poach” or non-solicitation clauses. These clauses prohibit one franchisee from hiring the employees of another system franchisee. When an employee works at a franchise, the employee develops valuable know-how like knowing how to use a particular machine or POS system, and doesn’t require the training or oversight that the typical newly hired employee does. Without the no-poach agreement, a franchisee could end up losing valuable employees who might move to a different franchise location for better benefits and higher pay. A vast number of franchisors have added these clauses to their standard franchise agreements. Many believe that, by doing so, they are helping to “keep the peace” and prevent franchisees from getting into conflicts with each other over “stealing” employees.
The effect of a no-poach clause will depend on whether there are multiple franchisees in a single market. For example, if a franchised pizza chain had 20 units in a market and they were all owned by one franchisee, then its employees would have no opportunity to seek better employment terms from other franchisees in the market. But, if those same 20 units were owned by 20 separate franchisees, then in a tight labor market those employees would benefit from the opportunity to move (or threatening to move) to a different franchise.
The practice has recently garnered substantial criticism by many who point out that employees who are subject to these agreements often “do not know their rights, cannot afford lawyers, receive little training, and are susceptible to threats from their former employers.” (http://www.hamiltonproject.org/assets/files/protecting_low_income_workers_from_monopsony_collusion_krueger_posner_pp.pdf). It is not a surprise that critics believe no-poach agreements give franchisees too much control over the labor market, allowing them to artificially depress wages.
This potential power over the labor market has caught the attention of the Department of Justice as well. In October 2016, the DOJ’s Antitrust Division, announced that from that point forward, it intended to pursue criminal charges against no-poach agreements that are not reasonably necessary to any separate, legitimate business collaboration between the employers. (https://www.justice.gov/atr/division-operations/division-update-spring-2018/antitrust-division-continues-investigate-and-prosecute-no-poach-and-wage-fixing-agreements). It is no surprise then that in July 2018, the Attorney Generals of California, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Washington, and Washington D.C. sent letters to Arby’s, Burger King, Dunkin’ Donuts, Five Guys Burgers and Fries, Little Caesars, Panera Bread, Popeyes Louisiana Kitchen, and Wendy’s requesting franchise agreements and other documents that relate to no-poach provisions. (https://ca.reuters.com/article/businessNews/idCAKBN1JZ2NX-OCABS). Several franchises – including Cinnabon and McDonald’s – have already voluntarily agreed to end the use of no-poach agreements. (https://money.cnn.com/2018/07/12/news/companies/no-poach-fast-food-industry-wages-attorneys-general/index.html).
Clearly, the time has come for franchisors to consider the cost-benefit of no-poach clauses in franchise agreements. Notably, a no-poach clause in a standard franchise agreement cannot be enforced by the franchisee against another franchisee – because only the parties to a contract can generally enforce the provisions in the contract. Therefore, the franchisee that lost an employee must turn to the franchisor to enforce the no-poach clause against the hiring franchisee. As a practical matter though, most franchisors prefer to avoid the complications of getting into a franchisee-franchisee dispute and would not enforce the clause.
A better approach, and one that is far less likely to run afoul of the law and generate controversy, is to make sure that individual franchisees enter into non-compete agreements with their key employees (i.e., managers). In the hypothetical pizza chain described above, franchisees should consider containing non-compete agreements from managers that prohibit them from working for direct competitors, including other franchisees. A “best practice” for franchisors might be to remind franchisees of the importance of entering into these agreements with key employees. The enforceability of such non-competes will depend on state law and on particular circumstances, but a franchisee would be able to seek enforcement without the franchisor’s involvement. Typically, a non-compete clause, unlike a non-solicitation clause, would be enforceable only with respect to higher-level employees, like managers.