“No poach” agreements, the ubiquitous practice where companies agree not to recruit each other's employees, are facing increased scrutiny from the federal government, lawmakers, state enforcement agencies and private class actions.

The recent spate of state enforcement actions and private class actions against fast-food companies and other big chain franchises provide a warning sign for employers across industries about potential liability for agreements that might suppress wages and limit employee advancement. The flurry of activity comes two years after the Justice Department signaled it would consider criminal charges if companies engage in no-poach and wage-fixing agreements.

“There are more hard-line stances on noncompetes and no-hires are in the crosshairs,” said King & Spalding litigation partner Cheryl Sabnis in California. “How do employers handle that? Companies are having to rethink old models. It's just not as simple as it once might have been.”

Most of the activity in this area, particularly from the states, has focused on national chain franchise agreements. Yet, employment attorneys warn other deals between competitors and other industries could be at risk.

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Washington state attorney general Bob Ferguson this month announced a fourth round of new settlements against chain restaurants. Dozens of large chains have now agreed to scuttle the provision that prevented workers from being hired between the franchise locations for a certain amount of time. These state investigations have expanded to other industries, and a coalition of states has threatened action in recent months. During this time, a slew of private lawsuits have grown in this area.

Law firms are taking notice. Skadden, Arps, Slate, Meagher & Flom recently issued an advisory on no-poach agreement, noting the uptick in enforcement. The firm warns, “Any employers that currently utilize no-poach agreements or are considering doing so should be sure to examine whether there are valid pro-competitive justifications for the agreement that outweigh any anti-competitive effect and whether the benefits of the no-poach agreement are worth the risk of the potential governmental or private challenge that is likely to occur.”

Companies like no-poach agreements as a measure of protection, and they can keep wages in check in an industry and offer stability for some of its high performers. Not every agreement between companies to restrict hiring is unlawful on its face.

Still, with enforcement on the rise, companies that embrace no-poach agreements should be prepared for government scrutiny and the risk of private lawsuits. The Justice Department's first-of-its-kind settlement in April in a no-poach case caught attention. The department issued guidance in October 2016 warning employers against these fairly common  practices as violations of antitrust laws.

The law firm Mintz, Levin, Cohen, Ferris, Glovsky and Popeo noted in an advisory that “the DOJ does not prohibit all agreements related to employee solicitation and recruitment.”

Nixon Peabody partner Alycia Ziarno in Washington said Tuesday on a webinar that the Justice Department's first major action signaled that similar agreements could be targeted across industries.

“Based on these enforcement  activities, there are key takeaways as a practical matter businesses can use,” Ziarno said. She said companies “should be looking  at hiring and compensation practices and any information exchanges with competing employers inside or outside industry, whether or not you compete in the same labor market.”

Many of the state enforcement actions involved fast-food companies, but the latest deals extended to other industries, including convenience stores and fitness centers. Franchises, in the eyes of management-side lawyers, could be just a start.

“They aren't necessarily going after the biggest fish in the pond,” Sabnis said. No-hire agreements are also common with the supposed “rock star” employee or other competitive candidate. The Justice Department originally targeted big technology firms who engaged in these practices and reached settlements.

Companies are loath to train workers, only to have them leave for an industry rival. From the employee perspective, any such agreements between companies in an industry could stifle wages and employee opportunities.

“There are competing concerns in play,” King & Spalding's Sabnis said. “On the one hand is the concept of a free market where people can move around, and on the other is a business owner trying to retain someone they have invested in.”

There are signs other states are following Washington's lead. A state coalition, including New York, California, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, Oregon, Pennsylvania and Rhode Island and the District of Columbia, sent letters in July to eight national franchise-based fast-food chains requesting information related to their franchise agreements and no-poach clauses.

Attorneys warn that companies that use no-poach agreements also should be prepared for private civil litigation. Former employees have filed a string of private lawsuits around the country targeting major chains, including Burger King, Jimmy John's and Domino's.

In the no-hire case Deslandes v. McDonald's, a judge in the  U.S. District Court for the Northern District of Illinois in June denied the company's motion to dismiss. The case targeted a no-poach clause that restricted horizontal competition for potential employees between franchisees and company-owned stores.

Rachel Brass, a Gibson, Dunn & Crutcher partner, representing McDonald's, argued the company's  employee no-hire agreements were reasonable because they prevented franchises from “raiding” one another after time and expense was paid for training them.

Judge Jorge Alonso of the Northern District of Illinois concluded that employment restraints are “not limited to management employees who had received expensive training at Hamburger University. The restraint applies even to entry-level employees with no management training.”

Karen Hoffman Lent, a Skadden partner in New York, said companies executing business deals might have justifiable reasons to draft no-poach agreements. “We think there is room for argument there,” said Lent, who leads Skadden's antitrust and competition group. “It's been interesting to see the quick willingness to succumb. We are interested in where the courts will draw the line. If a franchise can't engage in this behavior in some way, it could be hard for a joint venture, as well.”