Craig Tractenberg of Fox Rothschild.

No-poach agreements contain clauses which prohibit the solicitation of employees. The party bound by such an agreement agrees not to compete with the employer for its employees and agrees not to solicit an existing employee to leave. These are common in the franchise industry, and currently under attack as being anti-competitive. Some of these agreements are enforceable, but are now under scrutiny by competitors, workers, Attorneys' General of many states and the Department of Justice (DOJ). This article provides practical suggestions and best practices after providing a history of enforcement of such clauses.

Are No-Poach Agreements Antitrust Violations?

No-poach agreements between companies are anticompetitive and are violative of the antitrust law. In October 2016, the Obama-era DOJ and the Federal Trade Commission (FTC) issued a new HR Antitrust Guidance that stated that such agreements would be treated as “naked” agreements where horizontal competitors agreed to anticompetitive activities, and therefore will be treated as per se illegal under the criminal antitrust laws. Previously, nonsolicitation agreements were investigated by the government as civil violations, and were targeting industries such as technology where knowledgeable workers were scarce. The antitrust analysis treats such agreements as the allocation of labor, just like the prohibited allocation of customers between competitors, which harms workers by reducing competition for their services. The per se treatment of agreements between competitors not to solicit or hire the other's workers would not apply only in special situations like a joint venture, proposed merger or acquisition, where pro-competitive results could be achieved

Are Commonly Used No-Poach Agreements Unenforceable?

With the exception of a few states, nonsolicitation clauses are not unenforceable now to prevent raiding of employees between branded units, but are strongly disfavored and may become unenforceable and illegal.

The typical nonsolicitation provision in a franchise agreement would say in substance “you are prohibited during your term as a franchisee and for two years thereafter from soliciting an employee of another franchisee or the franchisor of this brand.” The purpose of this provision is to prevent employee raiding of another business unit of the brand, with the benefit of keeping the brand strong. Recently, the effect of this language has been scrutinized and Attorneys General of many states have investigated and attacked such clauses used by quick service restaurants. Some of those investigated, such as Arby's, Carl's Jr., McDonald's, Auntie Anne's, Cinnabon, Buffalo Wild Wings, H & R Block and Jimmy John's have voluntarily agreed to stop the practice of including and enforcing such clauses. Class action lawsuits have been started against other such companies.

Business groups such as the International Franchise Association argue legitimately that such clauses help franchisees obtain a return on their investment into the training of new workers. The government argues that the no-poach language unfairly limits the freedom of workers to seek promotions and earn a better living. Nevertheless, the tide seems to be turning against franchisors and new franchisees, and in favor of the workers. Interestingly, the same criticism has not been leveled against individual employee agreements preventing the employees from soliciting their co-workers, a contractual provision enforceable in most states.

Recommendations for Nonsolicitation Provisions

In franchise agreements, my recommendation is that provisions that prohibit solicitation of the workers of other franchisees or of the franchisor be eliminated. If these provisions already exist, then a letter can be issued advising that the provisions will not be enforced in the interest of worker's mobility. The clause is basically in the agreement as a disincentive to workers to solicit and is rarely enforced. Instead, if the facts warrant relief, the employer can bring a lawsuit for tortious interference with contract, especially where the employee solicited likely was solicited for inside knowledge which is technical or confidential. This is why it is so important to have valid agreements and practices that protect confidential information within the system.

For fast food workers who are hired at will, a written confidentiality agreement should be signed by them to protect the confidential information and to allow prevailing parties to recover fees and costs. In addition, no legal prohibition exists on having the workers sign a nonsolicitation agreement that they will not solicit their co-workers to leave. Current law treats such agreements like covenants not to compete. They are generally enforceable if limited to time, geographic reason and business importance. Courts generally are not as hostile to nonsolicitation agreements because they do not prevent the party bound from making a living. Remember that the back office people may have the most confidential information. Perhaps your wage chart is the competitive secret and your CFO knows you most sensitive information. Make sure that the employees know the importance of confidential information and how it is protected.

Best Practices for Employers

In addition to having proper legal documents, hire the right people. Identify the attributes of your best workers, and hire a clone, or another person who will make your place a good place to work. Reject all jerks who do not raise morale. Be careful who you promote, because promotion of jerks will cause people to leave. Pay people fairly, but more importantly, make work enjoyable, flexible and reasonable. Teach them new skills and provide them with the opportunity to learn. Every worker is an ambassador for your business. All workers need to feel appreciated if the customers are to feel appreciated.

Craig R. Tractenberg, a partner at Fox Rothschild, handles complex business disputes involving intellectual property, licenses, business torts and insolvency issues. He focuses on franchise companies' development and expansion. Contact him at [email protected].