No-Poaching Provisions in Franchise Agreements: What Should You Know?

Over the last year, there has been a surge in litigation over no-poaching agreements, and franchised businesses should take note.  The apparent linchpin of this activity came in the guise of October 2016 joint guidance (“Joint Guidance”) from the Federal Trade Commission and the U.S. Department of Justice, which announced that the agencies would begin to criminally investigate naked no-poaching or wage-fixing agreements.  The guidance, which has not been reversed by the new Administration, has spawned several class action lawsuits, both under state and federal law, that argue such agreements depress employee wages, restrict free movement of employees, and reduce job opportunities and benefits for workers.  Media scrutiny on this issue has also escalated, demonstrating the broader public perception challenges posed by these agreements.

Types of Agreements

While the impact of the Joint Guidance and related legal developments on the broad array of no-poaching provisions in franchise agreements is uncertain at this time, franchise systems should, at a minimum, carefully review their agreements to assess the nature of any no-poaching language that might be covered or otherwise impacted by the Joint Guidance and related legal developments.  Below are examples of the types of arrangements that, based on the Joint Guidance, are suspect to legal scrutiny.  FTC/DOJ have also prepared a list of red flags that employers should review.

  • Wage Fixing: Wage fixing occurs when two or more employers reach an agreement about employee salaries, benefits or other compensation. For example, DOJ filed a civil enforcement action against the Arizona Hospital & Healthcare Association when it set a uniform bill rate schedule that most Arizona hospitals would pay for temporary and per diem nurses.

 

  • No-poaching: No-poaching occurs when employers agree not to “solicit” or “hire” each other’s employees.  DOJ has brought three civil actions against technology employers who agreed to not cold call each other’s employees.  One of these companies also agreed to limit its hiring of employees who worked at a competitor.  Restaurant franchises are facing legal scrutiny for “no hire” arrangements that prevent franchisees from hiring shift leaders or higher from other franchisees.  No-hire cooling off period arrangements are similarly being challenged.
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