States launch probe of fast-food chains’ ‘no-poaching’ pacts

Attorneys general for 10 states and the District of Columbia are launching an investigation of contracts at fast-food chains that prevent their workers from switching franchises, targeting a practice that some economists say drags down wages for millions of Americans.

The group sent letters to eight fast-food companies — including Burger King, Dunkin’ Donuts, Panera and Wendy’s — to request information about “no-poaching” agreements that bar or restrict managers from hiring workers at another store in the same chain.

“No- poach agreements unfairly limit the freedom of fast-food and other low-wage workers to seek promotions and earn a better living,” said Massachusetts Attorney General Maura Healey, a Democrat whose office is leading the investigation.

The legal action threatens to add more complexity to an essential part of running a restaurant: hiring workers. Besides staff shortages and higher minimum pay, companies are facing an escalating employee turnover rate and slower customer traffic.

No-poaching clauses have come under increasing scrutiny by Democrats and some policy experts over the past several years as wage growth remains a persistent weakness for an otherwise strong and growing economy.

Economists say barring employees from switching between chain locations

unfairly prevents them from bargaining for higher wages, while businesses maintain they are necessary for local firms to recoup the costs of their investments in personnel.

“Many workers only learn these agreements exist when they are denied the chance to advance to a better job, earn more money or obtain familyfriendly schedule options” at a different franchise location, Pennsylvania Attorney General Josh Shapiro, a Democrat, noted.

Sens. Cory Booker, D-N.J., and Elizabeth Warren, DMass., said in March that they would introduce legislation to make no-poaching agreements illegal, calling them an “anti-competitive” practice. A Booker policy aide estimated that 70,000 fast-food restaurants would be affected by the bill, which has not drawn Republicans’ support.

Industry advocates have maintained that the practice is important for protecting their investments.

“Provisions in franchise agreements allow franchise owners to protect the significant financial investments they make to train employees in the skills and methods necessary to deliver the product or service to customers,” Matthew Haller, a spokesman for the International Franchise Association, said when Booker’s legislation was introduced.

The U.S. Justice Department’s antitrust division has also opened an inquiry into the practice.

The letter by the attorneys general asks the fast- food companies for a variety of information about no-poaching, including which employees have been subject to no-poaching clauses and whether the workers were told of the restrictions on their job mobility.

About 80 percent of fastfood workers are restricted by no-poaching clauses, according to Healey’s office. The other fast-food chains targeted by the states’ investigation are Arby’s, Five Guys Burgers and Fries, Little Caesars and Popeyes Louisiana Kitchen. McDonald’s Corp. is absent from the list, but the largest U.S. restaurant chain already is involved in a private, classaction lawsuit challenging the practice.

The letter from the attorneys general urged them to halt the use of no-poaching agreements. State authorities are calling on the chains to provide copies of franchisee agreements and communications related to no-poaching agreements by Aug. 6.

The efforts to tamp down on no-poaching clauses also reflect concerns about the role of “monopsony” power — a monopoly held by a purchaser or employer, rather than by a seller — in restraining wages. Paychecks for most American workers have stagnated despite low unemployment and high economic growth, leading some economists to blame weaker union rights and other constraints on worker power.

Fast-food employees often sign contracts not knowing these provisions prevent them from working at their chain’s other locations.

“By limiting workers’ outside options, a no-poaching agreement reduces worker bargaining power,” Princeton University economists Alan Krueger and Orley Ashenfelter said in a 2017 research paper cited by the attorneys general. “It might help explain a recent puzzle in the U.S. job market: unemployment has reached a 16-year low and job openings are at an all- time high, yet wage growth has remained surprisingly sluggish.”

State and local governments have raised minimum wages in recent years, forcing chains to increase prices and look for alternative ways to pare the costs. Wendy’s Co. set up ordering kiosks and expects to cut labor expenses as much as 4 percent this year. Other restaurants are starting to rely on third-party delivery.

The practice is not limited to fast-food chains. Jiffy Lube, H&R Block and Anytime Fitness are among the companies that have had no-poaching clauses in their franchisee contracts, according to Krueger and Ashenfelter.

Along with Massachusetts, the group includes attorneys general in California, the District of Columbia, Illinois, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania and Rhode Island.