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California Leads States in Probing Employers’ ‘No-Poach’ Pacts

Oct. 19, 2022, 9:00 AM

State attorneys general are investigating how employers collude to prohibit workers from switching jobs through unlawful “no-poach” agreements.

California is leading the way, with investigations in the works after some big actions against the fast food industry and Silicon Valley. “We approach this as a core economic justice issue,” said Eleanor Blume, California Department of Justice special assistant attorney general.

“This is one where we have workers’ rights and market manipulation all wrapped up in one, which makes it really important for us,” she said in an interview. “More will be coming.”

No-poach agreements are arrangements among employers not to recruit each other’s workers or to fix wages or other terms of employment among a pool of workers. Antitrust regulators argue they can reduce worker mobility, depress worker wages, and stifle competition.

States can buttress federal antitrust laws with additional unfair labor practice rules such as detailing what constitutes employer coercion, interference, or retaliation. Many states have recently gone further than federal law, enacting stricter standards for corporations operating in their jurisdictions.

One of the first major no-poach cases occurred in 2010 in California when the Justice Department settled with Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc., and Pixar to prevent the companies from entering into no-solicitation agreements for employees.

Since then, California has filed complaints against fast-food restaurant owners, franchise operators, and the Labor Department over a Trump administration rule allowing employers to pocket certain employees’ tips. The DOL rule was withdrawn under the Biden administration. The state also filed an amicus brief in the US Court of Appeals for the Ninth Circuit at the behest of former airline flight attendants over California’s wage and hour laws.

“This really picked up in the last year or two,” Faegre Drinker Biddle & Reath LLP partner and labor specialist David Woolf said. After regulators acted to curb employer noncompete agreements, focusing attention on no-poach agreements is the “next logical step,” he said.

State Actions

State attorneys general in Illinois, Massachusetts, New York, Pennsylvania, and Washington state have pursued similar cases. At least 29 states have enacted laws that in some way protect employees from employer-imposed noncompete contracts and no-poach arrangements, according to Bloomberg Law data.

Some states, such as California (Business and Professions Code § 16600) and Oklahoma (Title 15 § 217), ban no-poach agreements entirely. Other states provide limited protections for certain types of workers, such as car-sales personnel (Louisiana) or lawyers (New Jersey).

State interest in no-poach agreements picked up after the Federal Trade Commission and Justice Department in 2016 issued guidance saying enforcers should interpret federal antitrust statutes to extend to labor markets, and violations could result in criminal sanctions.

Erik Weibust, Epstein Becker & Green PC employment litigation specialist, said the continuing stream of cases by state enforcement authorities grabbed the attention of corporations and their executives. “Put it this way, I’ve heard a lot more from clients since the criminal cases have been reported on. It’s more real,” Weibust said.

“I think that kind of attention and that kind of spotlight bleeds down to the state level and will cause people to pay more attention to these issues than perhaps they have in the past,” said Justin Murphy, a partner at McDermott Will & Emery LLP. Murphy successfully defended DaVita Inc. and its former chief executive officer, Kent Thiry, from Justice Department charges involving no-poach arrangements.

Illinois

Illinois AG Kwame Raoul (D) this year filed suit against a group of temp agencies in his state that allegedly agreed not to try to hire each other’s employees when staffing their common client, Vee Pak LLC, a personal-care product manufacturer. Raoul asserts the deal violates the Illinois Antitrust Act.

“The purpose of this illegal conspiracy among ostensible competitors was to restrict competition among the Agency Defendants for temporary workers. With this illegal no-poach conspiracy in place, the Agency Defendants could avoid having to compete by offering better wages, benefits, or other conditions of employment,” the complaint said.

A potential wrinkle in the Illinois case is a question about whether the state antitrust law applies to employment conditions. The Illinois Supreme Court is scheduled determine whether the term “service” in the law includes labor performed by employees. The date for arguments before the high court hasn’t been established.

Fast Food

Several states have been active in investigating franchise agreements in the restaurant industry. Washington Attorney General Bob Ferguson (D) negotiated legally binding agreements requiring McDonald’s Corp., CKE Restaurants Holdings Inc., Carl’s Jr., and Inspire Brands Inc. subsidiary Jimmy John’s to end their alleged practice of prohibiting workers from moving from one fast-food franchise to another.

The companies were also required to remove the no-poach language from franchise contracts. The Washington agreement went beyond state franchises to include businesses across the nation. Ferguson’s office says workers at 237 corporate franchise chains are now protected from no-poach clauses.

Pennsylvania and Massachusetts AGs teamed up in 2018 to investigate franchise no-poach agreements involving Inspire Brands Inc. subsidiaries Arby’s and Dunkin’, Five Guys Holdings Inc., and Ilitch Holdings unit Little Caesar Enterprises Inc. The ensuing agreements from Pennsylvania AG Josh Shapiro (D) and Massachusetts AG Maura Healey (D) included similar promises that companies remove no-poach language from franchise agreements and notify employees about the case.

Those investigations followed the publication of an academic paper that concluded no-poach agreements were part of 58% of 2016 franchise agreements, including firms such as Jiffy Lube and H&R Block. No-poach agreements are more common in low-wage and high-turnover industries.

To contact the reporter on this story: Stephen Joyce in Chicago at sjoyce@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com; Amanda H. Allen at aallen@bloombergindustry.com