Originally published by Guest Contributor.
In July 2018, State Attorneys General from 11 states formed a coalition to investigate no-poach agreements in franchise contracts that restrict the ability to recruit or hire employees from the franchisor or another franchisee of the same chain. As part of the investigation, the coalition requested information about no-poach policies and practices from several fast food franchises.
This focus on no-poach agreements follows the US antitrust enforcement agencies’ policy guidance issued in October 2016 warning that agreements among companies—even companies that do not sell competing products, but merely compete for employee talent—would be treated as criminal antitrust violations like hard-core cartels. Companies and individuals, including human resources professionals, who agree not to solicit or poach employees from other companies could face criminal fines and jail sentences. In April 2018, the US Department of Justice filed its first enforcement action since the guidelines were issued. In that case, the no-poach conduct was enforced civilly because the conduct ended and was reported before the guidelines were issued. Officials from the Department of Justice have repeatedly stated their interest in investigating no-poach agreements and warned of the criminal penalties, including prison time, for violators.
Also in April, the Hong Kong Competition Commission issued an advisory warning businesses not to discuss or agree with competitors matters relating to hiring employees, such as agreeing not to “poach” each other’s employees. The advisory states that such discussions can violate competition law, even where the businesses involved are not competitors in the traditional sense. Other jurisdictions have also increased their interest in no-poach agreements.
All businesses, especially franchised businesses, need to be concerned about any no-poach provisions in their contracts. Even if the provisions are not enforced, their existence presents considerable risk. Many franchises have elected to remove such provisions from their contracts. However, this alone does not eliminate all the associated risks.Franchised businesses and other companies are susceptible to class-action lawsuits from current and former employees for four years (and sometimes longer) after the no-poach provisions are removed from contracts. These lawsuits can last for years and grow as more plaintiffs are identified. Agreements—even unwritten or “gentleman’s agreements”—between unrelated companies, including between independent franchises, not to hire or solicit employees raise risks of civil and criminal enforcement. Franchises doing business outside the United States have risks of scrutiny of no-poach provisions by foreign authorities.
Please contact your Baker McKenzie lawyer for more information.