What is a non-solicitation provision?
A non-solicitation provision is an agreement that prohibits franchisees from lobbying or taking any employees from the franchisor or other franchisees. It’s also called a “no-poaching” provision.

Why do franchise agreements have non-solicitation provisions?
Each franchise system is unique, and it takes time to train employees to do things the “system-way.” The more you invest in a worker, the more valuable that worker becomes. Unfortunately, that value makes a worker a potential target for poaching by another franchisee or former franchisee.

Talent-poaching is disruptive and leads to contention within a franchise system. Non-solicitation provisions help maintain system harmony and protect talent investment by prohibiting a current or former franchisee from lobbying or hiring a system-franchisee’s or franchisor’s employees.

Why would I ever remove non-solicitation provisions from my franchise agreement?
Attorney General Offices in California, District of Columbia, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island and Washington believe that non-solicitation provisions are anti-competitive. Massachusetts Attorney General Maura Healey said in a July 9, 2018 press conference that, “No-poach agreements unfairly limit the freedom of fast-food and other low-wage workers to seek promotions and earn a better living. Our goal through this action is to reduce barriers and empower workers to secure better-paying and higher-skill jobs.”1

Franchisors with non-solicitation provisions may be at risk of administrative action alleging that their no-poaching provisions unlawfully restrains trade. There’s also a potential for class action plaintiff lawyers to jump on the band wagon, taking the position that these provisions oppress a class of similarly-situated workers.

The focus by the states is largely aimed at quick-serve and fast food industries, where wages tend to be lower and the impact could be more severe on franchise employees, but the effects are likely to be seen in the wider franchising industry as well.

What are my options?
It’s difficult to make an informed decision when the issue is still unsettled and developing. Until things are more settled, we see three options:

– Wait to take action until the issue is settled. We think this is a risky approach given the uncertainties in how these investigations will proceed and the potential penalties for franchise systems that still have non-solicitation provisions when new laws or regulations are ready.

– Remove non-solicitation provisions now, or at the next opportunity (e.g. renewal). We recommend this approach. While non-solicitation provisions may serve a valuable function in maintaining system goodwill among franchisees, we believe the potential administrative, civil, and potentially criminal liability outweighs those benefits.

– A third alternative is to remove non-solicitation provisions and update the operations manual to encourage non-solicitation as a “best practice,” rather than a contractual requirement. While there would be no legal recourse against a franchisee, it may at least establish a culture to discourage the practice.

Notes:
1 https://www.mass.gov/news/ag-healey-leads-multistate-investigation-of-worker-no-poach-agreements-at-national-fast-food (last viewed July 27, 2018).