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San Diego Corporate Law: Beware No-Poach Provisions in Franchise Agreements
Employer no-poach agreements have made news headlines lately. See CNN-Money report here. It has been reported that, in mid-July 2018, seven fast food restaurant chains agreed to end their franchise rules that prevented or prohibited franchise employees from being hired by another franchise. If you own a franchise or are a franchisee or considering buying a franchise, you should have a good San Diego corporate attorney review the franchise agreements to ensure that no-poach provisions are absent or removed if present. Here is a brief discussion of some of the legal issues.
San Diego Corporate Law: No-Poach Agreements are Illegal in California
In general, in California, employee non-compete agreements and any sort of restraint on trade agreements are illegal and unenforceable. No-poach agreements — also called no-solicitation or no-switching agreements — are a form of non-compete agreement/restraint on trade. They also have the effect of unlawfully restricting and restraining employee wages. As such, employees can sue an employer who has and enforces such an agreement. See, for example, the case of In Re: Animation Workers Antitrust Litigation, 123 F. Supp. 3d 1175 (US Dist. Court, ND Cal. 2015) involving no-poach agreements/conspiracies among film production companies.
With respect to franchises, typically no-poach provisions are buried in long and complex franchise agreements and, often, franchisees are unaware of the provisions until an employee seeks to switch to a different franchise location. In these no-poach provisions, typically the franchisee agrees not to hire employees from other franchisees (or from franchisor-owned locations) — often, the provisions are limited to managerial staff, but some include all employees. In general, franchisers and employers favor no-poach agreements in order to conserve staffing talent and to save costs by reducing turnover and the corresponding need to train new employees. However, the provisions are illegal.
According to the article linked above, the restaurants who have now agreed to end no-poach policies include Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Cinnabon, Jimmy John’s, and McDonald’s.
Along with other Attorneys General from other states, the Underground Economy Unit of the California Department of Justice is investigating no-poach practices among many large franchises operating in San Diego and other parts of California. Legal compliance and investigatory letters have gone out to many franchise chains. See USA Today report here.
In addition to being an illegal restraint on pursuit of employment by workers, the no-poach agreements violate antitrust laws, which prohibit collusion among businesses to fix prices and otherwise unlawfully affect the market. The US Department of Justice has begun taking action against companies with no-poach agreements. See report here.
San Diego Corporate Law: What Should San Diego Franchises do?
Given the new emphasis on prohibiting and punishing no-poach agreements, San Diego franchises should consider doing the following:
- Do not agree in the future to a no-poach/no-switching policy
- Revoke any existing no-poach/no-switching policy
- Do not engage in any activity that might be seen as prohibiting or discouraging employees from transferring to other franchise locations
- Have good corporate counsel review franchise agreements to ensure compliance
Contact San Diego Corporate Law
For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to review your franchise agreements, help with the purchase (or sale) of a San Diego franchise and/or assist with any business-related matter.
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