A little-known practice by major corporations has come into the crosshairs of state attorneys general, Congress and the courts: companies forcing their franchises to agree not to hire workers from other franchises in the same chain.
Critics argue that such agreements serve no purpose other than to keep worker wages down. In the meantime, the corporations in question are quick to argue in court that the franchises are all individual businesses that operate more or less independently.
This practice isn’t illegal — yet. That might change. Even if it doesn’t, it could still become a major headache for the business community if it reinvigorates an Obama-era effort to pursue cases against big corporations by arguing they are responsible for workplace policies at their franchises.
Attorneys general from 10 states and the District of Columbia sent letters in July to major fast food companies like Burger King, Arby’s and Dunkin Donuts, demanding to know if they engaged in the practice and seeking internal documents relating to it.
“The AGs’ investigation will look at behavior through state consumer protection laws,” said Joe Grace, spokesman for Pennsylvania attorney general Josh Shapiro, a Democrat. “We don’t know what we’ll find until we see the documents we’ve requested.” Grace declined to elaborate on their strategy other than to say that they would “consider all options.”
Other states taking part are California, Maryland, Illinois, Minnesota, Massachusetts, New York, New Jersey and Oregon.
The move has businesses spooked. Three days after the letter, Arby’s, Carl’s Jr., McDonald’s, Jimmy John’s, Auntie Anne’s, Buffalo Wild Wings and Cinnabon all said they would end the collusive hiring practice.
And others may drop it soon. Matt Haller, executive vice president at the International Franchise Association, said, “Though every individual brand is different, many companies have already eliminated anti-poaching clauses in their agreements and others are reviewing their own policies.”
The issues had been simmering for a while. McDonald’s employees sued the corporation for the practice under anti-trust laws last year, a case which is still winding its way through the courts. Rep. David Cicilline, D-R.I., introduced legislation in the House in April to amend the Fair Labor Standards Act to prohibit it. Sens. Elizabeth Warren, D-Mass, Chris Murphy, D-Conn., and Ron Wyden D-Ore., introduced similar legislation the same month.
Noncompete agreements that set up lengthy “cooling off” periods before workers can accept a job at with rival companies are a fairly common practice by employers. They’re meant to insulate the employer from having rivals swoop in and take their best people.
But corporations often include similar clauses in their standard franchise contracts, in effect flipping the process on its head. Their clauses prohibit employers from hiring workers if they worked for another one of the corporation’s franchisees.
Nobody on either side seems to know when the practice began, though it apparently goes back decades. A trade industry source characterized it as the franchisors’ attempt to prevent friction and rivalry within its chain.
Critics see a more nefarious purpose: keeping worker wages low. “By limiting potential job opportunities, these agreements may restrict employees’ ability to improve their earning potential and the economic security of their families,” the AGs said in the letter.
The practice has become more common recent years, too. A new study by the National Bureau of Economic Research determined that such noncompete agreements were used at 58 percent of major franchise chains, up from one-third of franchises two decades ago.
Even if the congressional bills stall and the practice remains legal, it could present a different problem for corporations, notes Princeton economic professor Alan Krueger, who co-authored a recent National Bureau of Economic Research study on the issue. “It would seem to me that no-poaching agreements, if they are legal, raise a serious question as to whether there is a ‘joint employer’ relationship between the franchisor and franchisees,” Krueger told the Washington Examiner.
“Joint employer” status, in this context, would mean that the large corporation could be held legally responsible for workplace violations at its franchises, because it has direct control over the latter’s decisions. The Obama administration strove to extend joint employer to cases where one company had “indirect control” of practices at another, a potentially vast expansion of legal liability for corporations.
The National Labor Relations Board launched a case against McDonald’s on those grounds in 2014. The business community lobbied Congress and the White House hard to roll these efforts back. The Trump administration has moved in that direction, but the Obama-era standard remains technically in effect and the McDonald’s case is currently unresolved. An NLRB administrative law judge rejected in mid-July the board’s attempt to settle the case.
So while the Trump administration isn’t pursuing joint employer cases, others theoretically could. Notably, the attorneys general letters to fast food companies demand “Any and all communications” regarding noncompete agreements, including rules, requirements and “any and all documents related to training provided to franchisees or store management.” That would appear to suggest that the attorneys general are trying to use the noncompete agreements to establish that the corporations directly instructed the franchises on how and when to hire people.
“We would not want to discuss potential legal theories,” Grace said, when asked if the attorneys general were pursuing a case on these grounds.
