How the Washington Attorney General Is Changing Franchise Agreements Nationwide and What It May Mean For You

Corporate Law Practice Group

By Corporate Law Practice Group

The state of Washington has a reputation as a worker-friendly state with some of the highest minimum wages in the country. So it’s no surprise that Washington Attorney General Robert Ferguson has been aggressively pursuing large corporate franchisors that include no-poach clauses in their franchise agreements. What is surprising is that he’s affecting franchise agreements across the U.S.  (A “no-poach clause” is language in the franchise agreement that prevents a franchisee from hiring current and former employees of another franchisee or its franchisor.)franchise

Businesses are always trying to gain competitive advantages by pushing the boundaries of regulations that promote fair competition. For example, many workers have non-compete clauses in their take-it-or-leave-it employment agreements. These clauses prevent a  competitive labor market which creates a wage-fixing affect and triggers anti-trust laws. As a result, many courts have determined that non-compete clauses for employees without knowledge of trade secrets and with little ability to sway customers to follow them are unenforceable. Courts have refused to enforce non-competes for yoga instructors, camp counselors, and fast food employees.

Many franchisors include “no-poach” clauses in their franchise agreements. The terms restrict franchisees from poaching each other’s employees by allowing the franchisor to terminate the franchise of any franchisee who hires a worker employed by another franchisee or its franchisor. No-poach agreements and non-compete agreements both discourage employees from leaving their current employer.

Lower employee mobility between franchise locations prevents franchisees from hiring some of the most desirable candidates and impedes wage increases for experienced employees. Despite the short-term benefit to the franchisor and the franchisee of artificially holding wages down, no-poach agreements hinder the acquisition and development of valuable talent which hurts the franchisee (and franchisor) in the long run. For fast food franchises in states with higher minimum wages, the worker’s wage may not be impacted but franchisees remain at a disadvantage as they are unable to hire workers with the most relevant experience.

The U.S. Department of Justice and the Federal Trade Commission jointly issued guidance on no-poach agreements in 2016.  Following this guidance, attorneys general in 10 states (Washington, California, Illinois, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and the District of Colombia) have worked to eliminate no-poach clauses of franchise agreements.

Ferguson led the charge. He secured agreements from over 60 franchisors in multiple industries to end their use of no-poach clauses in current and future franchise agreements not only in the state of Washington, but nationwide. Recently, Jersey Mike’s, a sandwich shop with only 41 of 1,343 nationwide locations within Washington state, attempted to rejected Ferguson’s offer to enter into the “Assurance of Discontinuation.” This forced Ferguson to bring the first lawsuit any state attorney general had brought against a corporation for no-poach clauses. The lawsuit pressured Jersey Mike’s into a $150,000 settlement in addition to executing the assurance to discontinue the use of the no-poach clause.

It’s unclear what the practical effect of this change will be. Some franchisors weren’t enforcing the clause and many franchisees weren’t aware it existed. Where the no-poach clause was heavily enforced, you may see wages rise. Increased wages may squeeze some franchisees but will  also create a landscape for effective franchisees to grow and expand, capitalizing on the ability to better  hire talent.

(c) tashatuvango

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