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    Welcome to the End of No-Poach Clauses

  • Critics and attorneys are targeting a common practice that prevents workers from moving between franchises within the same brand.

    istockphoto/fizkes
    A no-poach clause existing in a company’s agreement with a franchisee prevents the management of one operator’s restaurant from hiring workers from another restaurant in that same franchise.

    As the competition for skilled workers continues to heat up, restaurants have come under scrutiny for a pervasive employment practice. In September 2017, two Princeton University researchers published a paper revealing that roughly 32 of 40 of the largest quick-service restaurant chains in the U.S. have so-called no-poach clauses in their contracts with franchisees.

    One of the paper’s authors, economics professor Alan Krueger, says multiple factors have led to the proliferation of no-poach agreements in foodservice—particularly the quick-service industry.

    “Fast-food restaurants tend to have high turnover, in part because wages are relatively low,” Krueger says. “I suspect that no-poaching agreements are of greater benefit to chains when turnover is high, and that they are a greater constraint on worker mobility in high-turnover industries, as well.”

    In simple terms, a no-poach clause existing in a company’s agreement with a franchisee prevents the management of one operator’s restaurant from hiring workers from another restaurant in that same franchise.

    As an example, a Florida resident filed a class-action lawsuit against McDonald’s in late June 2017 alleging that she had been denied a position at another location that would have offered her significantly more pay and better growth potential because she was employed by another McDonald’s, according to the lawsuit.

    Attorneys for McDonald’s filed a motion to dismiss that suit in late 2017, arguing the no-poach provision in McDonald’s franchise contracts had nothing to do with the plaintiff not receiving the job. Nevertheless, in June a U.S. District Court judge ruled that the suit could continue.

    Krueger says these clauses that prevent poaching could be keeping labor costs lower for several industries. 

    “First, job changing is a major means by which workers obtain higher pay and better working conditions,” he says. “But no-poaching agreements limit workers’ opportunities to change jobs within a franchise system and seek better pay and better working conditions. Second, by restricting competition, no-poaching agreements could suppress worker bargaining power and reduce pressure for employers to raise wages across the board.”

    The study by Krueger and his coauthor, Orley Ashenfelter, was based on data drawn from 2016 franchise agreements used by 156 of the largest franchise chains in the U.S., including 40 major quick-service restaurant chains. According to that data, roughly 58 percent of those 156 franchise chains had no-poach clauses or similar language in their contracts.

    Critics charge that no-poach clauses restrain worker competition in the industry and could have a major hand in keeping wages stagnant in that area. Two years ago, the U.S. Department of Justice Antitrust Division announced it intended to “proceed criminally” against no-poach and wage-fixing agreements. The department has called such clauses unlawful.

    Meanwhile, Washington State attorney general Bob Ferguson, along with a host of other U.S. attorneys general, launched investigations into the practice. The sudden attention to no-poach clauses has not, however, fallen on deaf ears. Restaurant chains are already committing to change.

    In July, Ferguson issued a statement detailing how seven major restaurant corporations—including quick serves Arby’s, Auntie Anne’s, Carl’s Jr., Cinnabon, Jimmy John’s, and McDonald’s—had agreed to end those practices in order to avoid a lawsuit from his office after a months-long investigation. The move away from no-poach clauses is not expected to be constrained to Washington State, but rather would become a corporate policy nationwide.

    Several national chains, including some from this list, were contacted regarding this story, and all declined to comment.

    Last year’s study spanned 21 industries (quick and full service analyzed separately) ranging from automotive and lodging to maintenance services and retail stores. Quick service was among the categories with the highest prevalence of no-poach clauses; 32 of the 40 featured brands included those restrictions. While one might argue that the nature of quick service requires such measures, Krueger and Ashenfelter noted that the clauses are less common in other consumer-facing businesses like real estate agencies and hotels.

    Ashenfelter says in an email that he isn’t sure why some franchise agreements included these clauses.

    “The only explanation I’ve heard is they want to preserve their investments in workers, but why then let them go to another chain, when their investments would be better protected by keeping them in the chain? And further, why not just ask the workers to sign non-competes, so they would know they cannot depart?” Ashenfelter asks.

    For that reason, Krueger says he can’t see a sound business justification for no-poach clauses other than to restrain competition between businesses’ franchise locations.

    Unlike non-compete clauses, which are typically listed in a new hire’s contract, no-poach clauses are not listed in those individual contracts, so people hired at these businesses frequently have no idea of these restrictions, the study indicated.

    The no-poach mandate echoes another recent controversy for restaurants: the joint-employer rule. The crux of that hotly debated topic is determining the degree to which a parent corporation is responsible for the actions of its operators. But whereas brands have made haste in striking no-poach clauses, the question of joint employers is still somewhat hazy. If restaurants shift from no-poach to non-compete agreements, the issue may resurface.