Client Alerts
July 16, 2018

Quick-Service Restaurant Chains Agree to End 'No-Poach' Restrictions

Stites & Harbison Client Alert, July 16, 2018

by Michael C. White

A typical provision in franchise agreements, known as a "no-poach" or "no-switching" clause, prohibits the franchisee from hiring employees employed by other franchisees in the same system. Seven (7) large fast-food franchisors have agreed to discontinue this practice as the result of an agreement announced in a July 12, 2018 release by Washington State Attorney General Bob Ferguson's office.

According to the Ferguson release, the companies agreeing to the discontinuance are Arby's, Auntie Annie's, Buffalo Wild Wings, Carl's Jr., Cinnabon, Jimmy John's and McDonald's. Under the agreements (known as "assurances of discontinuance"), these franchisors must, among other things: (1) stop including no-poach language in their new and renewal franchise agreements; (2) amend and remove no-poach provisions in existing agreements; (3) stop enforcing the clause in existing agreements; and (4) notify its franchisees of the requirements of the agreement.

Ferguson's office indicated that the requirement to amend and remove the clause from existing franchise agreements applies to locations in Washington State while the other requirements apply nationwide. Civil penalties could be levied against any franchisor that fails to comply with the assurances of discontinuance.

In announcing the agreement, Ferguson's office put forth the position that no-poach provisions "decrease competition, decrease opportunities for low-wage workers and stagnate wages." As an example of how the provision may harm a worker, Ferguson's office noted that if an employee cannot move to another outlet within their franchise system, their current location may have less incentive to give them raises. Ferguson's office also noted that employees generally are unaware of the no-poach rules because they appear in franchise agreements between their franchisee employer and a corporate franchisor, a contract to which the employee is not privy.

Franchisors should note that the scrutiny against no-poach provisions is not limited to that coming from Washington State. Last week, attorneys general from ten (10) states and the District of Columbia announced their investigation into the no-poach practices of eight (8) fast food franchisors.

With no-poach provisions coming into widening disfavor at a rapid pace, franchisors whose franchise agreements contain such clauses may want to examine just how important no-poach protection is to them. Franchisors should keep abreast of the trend started in Washington State and consider proactive measures to minimize the cost of getting caught up in the next wave of investigation.

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Franchise & Distribution Employment Law Employment Litigation Corporate General Services