No-poaching pacts under scrutiny

The State of Washington announced last month that seven fast food chains would end the practice of ‘no-poaching’ clauses in contracts with their franchisees across the U.S. ‘No-poaching’ agreements are typically between two companies that agree not to hire each other’s employees; in this case, they stipulate that franchises of the same corporation should not hire workers from one another.

Threatened by a lawsuit by State Attorney General Bob Ferguson, restaurant chains like Arby’s, Auntie Anne’s, Buffalo Wild Wings, Carl’s Jr., Cinnabon, Jimmy John’s and McDonald’s agreed to stop the practice. “The companies will no longer enforce provisions included in franchise agreements that stop workers from moving to potentially better positions and wages, and will remove the language from current and future contracts,” said Mr. Ferguson.

‘No-poaching’ clauses are in sharp focus as the Donald Trump administration and Democratic States threaten action against companies for these. The U.S. economy is growing but the wages are not, and this has been an underlying reason for the political turmoil. Labour distress has contributed in good measure to the rise of the ‘Trump movement’.

The Antitrust Division of the Department of Justice put companies “on notice” in April, recalling an announcement in October 2016 — during the Barack Obama presidency — that it intends to pursue criminal proceedings against violators. “When companies agree not to hire or recruit one another’s employees, they are agreeing not to compete for those employees’ labour. The same rules apply when employers compete for talent in labour markets as when they compete to sell goods and services. After all, workers, like consumers, are entitled to the benefits of a competitive market. Robbing employees of labour market competition deprives them of job opportunities, information, and the ability to use competing offers to negotiate better terms of employment,” it said in a statement.

The division noted two practices that are unlawful in most cases — ‘no-poaching’ agreements and wage-fixing agreements that involve an agreement with another company regarding employees’ salary or other terms of compensation.

State laws prohibit ‘unreasonable restraint of trade’, “which applies as much to the labour market as it does to the burger market,” said Mr. Ferguson. He is one of the 11 Attorneys General of Democratic States who have written to companies, warning of legal action if ‘no-poaching’ arrangements are not discontinued. Democratic Senators Cory Booker and Elizabeth Warren have sent letters to about 90 CEOs, asking them to disclose their ‘no-poaching’ clauses. They are also pursuing legislation to make the practice illegal.

Informal, unwritten deals

While the negative impact of ‘no-poaching’ pacts on labour market competition and wages is evident, many employers argue that such agreements protect investments they make in workers. Companies also argue that they will have better incentives to invest in employees if they are required to continue with them for longer periods.

Peter Cappelli, management professor at Wharton School, observes that “informal, unwritten no-poaching agreements have been common among Silicon Valley technology companies”. In one widely reported case, Apple, Google, Intel and Adobe agreed to pay $415 million to settle a ‘no-poaching’ lawsuit three years ago with affected employees.

While the negative impact of the ‘no-poaching’ pacts on labour market competition and wages is evident, many employers argue that such agreements protect investments they make in workers

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