New Jersey employees of four different fast-food chains won a significant victory last month when it was announced that they would no longer use or enforce “no-poach” contracts or agreements to restrict their employees. The chains – Dunkin’, Five Guys, Arby’s, and Little Caesar’s – came to formal agreements with the State of New Jersey to end the practice. These agreements were made in the wake of an investigation into the practice, launched by the Attorneys General of 13 states, including New Jersey. New Jersey’s Attorney General Gurbir Grewal released a statement regarding the agreements, saying “I am glad that Arby’s, Little Caesar, Five Guys and Dunkin’ now recognize the unfairness of no-poach agreements and will stop using them, and I am proud of the multistate investigation that led to their change of heart.”
The particular agreements at issue here restricted fast-food employees from leaving their employment to work for a different franchise of the same fast-food company. For example, a cashier at a Dunkin’ in New Brunswick would be restricted from working as a cashier at a Dunkin’ in Trenton. Upon applying to the Trenton location, the prospective employee would disclose their previous employment at the New Brunswick location, causing the Trenton location to deny the employee’s application. This can be particularly harmful when, for example, the New Brunswick cashier applies for a vacant store manager position at the Trenton location because there was no managerial position open at the New Brunswick location. In this case, the no-poach agreement doesn’t just stifle competition, it harms the individual employee by denying them an opportunity to advance their career and increase their earning potential.
The rationale supporting these agreements, ostensibly, is a need to protect the resources expended on training the departing employee. Without these agreements, the fast-food companies argue, franchisors would be damaged as they would not be able to recoup the investment they made in the employee. Additionally (though this is not one of their stated rationales) these agreements provide substantial benefit to franchisors by reducing wages and depressing wage growth. By outlawing an employee from working for another franchisor, the franchisor in question insulates themselves from competing with that franchisor. There is no concern that an employee will go to the competitor for better pay, so there is no incentive to offer better pay. This is an insidious result of no-poach agreements, and one of the main reasons they have come under so much scrutiny in recent years. This is closely related to the concern that no-poach agreements may also run afoul of Federal anti-trust law, as the franchisors could be viewed as colluding to fix wages.
No-poach agreements have long been viewed with suspicion by the courts. Clearly, the agreements are intended (at least in part) to stifle competition, a result that the law views unfavorably. Stifling competition is permissible, however, when it is a byproduct of achieving a legitimate and overriding goal. For example, courts commonly enforce restrictions that limit competition where the overriding goal of the restriction is to protect trade secrets or other confidential information that the departing employee was privy to while at the company. As stated above, the no-poach agreements in the fast-food industry are ostensibly used to achieve the goal of protecting the investment the employer makes in training the employee. Balanced against the potential and actual widespread harms caused by these agreements, however, this rationale has increasingly been found to be insufficient.
Unlike the protection of trade secrets or confidential information, these agreements sought to protect a financial investment made in an employee. In order to protect this investment, employers do not have to resort to the extreme mechanism of no-poach agreements. An alternative approach, that achieves the same goal while avoiding the harm, is to have a ‘training cost repayment’ agreement. This type of agreement would state that, when an employee leaves their employment after a short period of time, they will repay the company some amount to offset the company’s investment in training the employee.
These agreements can take a multitude of forms to reflect the practical realities of the given employment situation. The period within which repayment is required, whether repayment is pro-rated, and the amount the employee needs to repay would all depend on the particular situation. In some cases, repayment may not be permissible where the ‘training’ an employee receives is illusory. Ultimately, the employer would be allowed to recoup a reasonable amount from the employee and should be ready to demonstrate why that amount is reasonable. This system is far better than a no-poach system, as the goal of protecting the employer’s investment would still be robustly protected, while avoiding the byproducts of stifling competition and depressing wages.
The March 2019 agreements by these four fast-food companies is a great sign for New Jersey fast-food employees, and franchise employees in general. It shows that the companies realize these agreements are harmful to their employees and to the public and, rather than lose their case in court, they voluntarily stopped the practice. If you are a franchise employee subject to a no-poach agreement that you believe violates your rights, the employment attorneys of Smith Eibeler may be able to help. If you believe that your employer is unfairly or illegally restricting you from working for a competitor, call the non-compete attorneys of Smith Eibeler today.