Cry us a river. We understand the labor challenges of restaurants quite well. But this is about chains squeezing franchisees and franchisees screwing workers. For reference, the CEOs of three of the four lead brands in these cases — Burger King, Dunkin’ Donuts, and Wendy’s — made $14.4 million, $5.3 million, and $5.1 million last year, respectively. And their non-competes top out at a year, and only if they're fired for cause.
— Jason Clampet
Fast-food restaurants are already grappling with rising wages and a smaller pool of workers. Now 11 U.S. states want to restrict chains’ ability to bar employees from jumping to another franchisee across town.
The investigation by states including Massachusetts, California, New York and Illinois, announced Monday, is targeting so-called no-poaching agreements at some of the industry’s largest chains. The states argue that the companies — the list includes Arby’s, Burger King, Dunkin’ Donuts and Wendy’s — are depressing workers’ earnings by preventing them from moving to different franchisees of the same chain.
“No-poach agreements trap workers in low-wage jobs and limit their ability to seek promotion into higher-paying positions within the same chain of restaurants,” Illinois Attorney General Lisa Madigan said Monday in an emailed statement. “It unfairly stops low-income workers from advancing and depresses their wages.”
The legal action threatens to add more complexity to an essential part of running a restaurant: Hiring staff. Besides staff shortages and higher minimum pay, companies are facing an escalating employee turnover rate and slower customer traffic.
The investigation also names brands such as Five Guys, Little Caesars, Panera 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, class-action lawsuit challenging the same practice.
Maryland, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island are the other states taking part in the coordinated investigation, along with the District of Columbia.
Ed Shanahan, executive director of the Dunkin’ Donuts Independent Franchise Owners group, said the probe could exacerbate the chains’ efforts to find workers.
“You can’t keep squeezing small business, especially in such a tight labor market, and not expect problems on the other end,” Shanahan said. “The labor shortage is a big issue.”
The chains received a letter from the 11 attorneys general urging them to halt the use of the no-poach agreements. State authorities are calling on the chains to provide copies of franchisee agreements and communications related to poaching policies by Aug. 6.
State and local governments have raised wages in recent years, forcing chains to raise 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.
During his 40 years in practice, attorney Carl Zwisler hasn’t seen cases of no-poaching clauses being declared unlawful. Zwisler, who specializes in franchise law at Gray Plant Mooty in Washington, said that sometimes state courts see the agreements as less restrictive than non-compete agreements that ban workers from going to other companies in the same industry.
With turnover already high, franchises may have more difficulties in maintaining the quality of customers’ dining experience, Shanahan said.
“All of those employees have to be trained so that you have that consistency of service, consistency of quality. And that’s an ongoing battle,” he said. “You can’t keep piling on to that cost of doing business.”
–With assistance from Lisa Wolfson
©2018 Bloomberg L.P.
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