Upjohn Institute Senior Economist Aaron Sojourner testified March 16 before a Minnesota state House of Representatives committee on so-called "no-poaching" agreements. Under such arrangements employers agree not to hire each other's employees.
Sojourner presented evidence on how these agreements, which employees typically do not know their employers have entered into, affect wages.
The testimony is part of the Labor and Industry Finance and Policy Committee consideration of the bill HF 1831: Restrictive franchise agreements prohibited.
The testimony is presented below as written by Sojourner and co-author Evan Starr:
As a labor economist, I study institutions in the labor market such as employment contracts and how they affect wages and job mobility. For 13 years, I was a professor at the University of Minnesota’s Carlson School of Management, I spent a year working at the White House Council of Economic Advisers as the senior economist for labor in the Obama and Trump administrations, and now work for the W.E. Upjohn Institute for Employment Research which is a non-partisan research institute focused on how labor markets work.
Thank you for your work on the important issue of no-poach agreements in franchise agreements and the chance to share what economists have learned in recent years about this issue. This research shows such collusive agreements suppress wages and limit employee freedom.
What are no poach agreements? These are agreements between two or more organizations, in this case between franchisees of the same franchisor. Here’s one from Sbarro:
“Developer covenants that during the term, except as otherwise approved in writing by Sbarro, developer shall not knowingly employ or seek to employ any person who is at the time employed or during the 6 months period prior to such time was employed by Sbarro or by any licensee of Sbarro.”
It’s in the franchise agreement. So, say I want to start a Sbarro franchise. I have to agree to this. The terms then prevent me from recruiting or hiring any current or recent employee of other Sbarros & limit other Sbarro franchisees from recruiting or hiring my workers.
In 2016, it came to light that many franchises were using these kinds of restrictions – including AAMCO Transmissions & Total Car Care, Burger King, Buffalo Wild Wings, H&R Block, Sport Clips salon and many others. Data from major franchise filings showed that 58% used them n 2016, up from 36% in 1996.
What do they do? They are a way for employers within the same franchisors to collude against workers, to agree not to compete against each other, to limit wage competition and limit each employees’ job options. This anti-competitive practice suppresses wages and boosts profits.
Why be concerned? First, they operate above the heads of workers. Workers don’t know these agreements exist. It may seem easy for a franchise worker to find another fast food job but these collusive franchise agreements, the problem is that the agreement takes away exactly the outside opportunities for which a worker is best suited.
Take a Sbarro worker, When their life changes, and they want to get a job at another Sbarro that’s closer to their kid’s new school or their aging parent’s home, and they put down on the application their prior work experience that is super-relevant at a Sbarro, they are unknowingly taking themselves out of the running for the job. Given Sbarro collusive agreement, when the new Sbarro sees the applicant’s work experience, they just throw the application in the garbage. The result is that franchisees do not have to compete with each other for labor.
What is the impact on workers? After it came to light, the Washington State Attorney General started cracking down on franchisors that used these. Exploiting that change, recent research finds that, in companies that had to stop using these agreements, wages grew 4% faster among those franchises that had to stop versus other franchises. Workers have median income of $26,000 a year. So that means that removing the collusive agreements led typical employees’ wages to rise by about $950 a year.
In a similar case, a famous case, a bunch of Silicon Valley employers – Apple, Google, Intel, Adobe and others -- had a similar collusive agreement not to recruit or hire each others’ employees. After, DOJ investigated and tried to stop the collusion. Economist Matt Gibson studied what happened and found that this agreement between less than a dozen employers had been reducing employees’ wages by 2.5%. He found faster wages increases in those firms than similar firms after the DOJ crackdown.
So what does this evidence teach us? Employer competition can be fragile and employers can profit by colluding not to compete for talent. If you prevent employees from moving to another franchisee within the same franchise, that’s the place where their skills are most relevant and valuable. By employers taking away that freedom from workers, it can have a meaningful effect on their earnings, in this case almost a thousand dollars a year – which makes a big difference for working Minnesotans.
Finally, it’s worth mentioning some of the justifications offered by advocates for these restrictions. They say, we need to protect investments in worker training or we have trouble with retention already. We should be skeptical of these types of arguments.
First, there’s no reason to take away the opportunity from workers for which they are best suited without the worker knowing about it. These are organization level agreements. The workers don’t know about them. Instead, if you want to retain, just pay the worker better. Or directly offer the worker a contract that says, we want to provide you with some training but to get it, you have to agree that if you leave in the next few weeks or months, you have to pay back some of those training costs. Those are agreements that workers can choose whether they want to enter into and can ask for compensation in return. The no-poach goes over their heads.
The Silicon Valley agreement between employers is already illegal under the federal Sherman Act. But franchise agreements to not recruit or hire – between franchisors and franchisees – is a legal grey area. This bill would clarify that, closing a loophole and bringing this into alignment with the law forbidding inter-employer agreements.
Callaci, Brian et al. (2023) The Effect of Franchise No-Poaching Restrictions on Worker Earnings.
Gibson, Matthew (2019) Employer Market Power in Silicon Valley. IZA Discussion Paper No. 14843.
Krueger and Ashenfelter (2022) Theory and Evidence on Employer Collusion in the Franchise Sector. Journal of Human Resources.
Starr, Evan (2019) The Use, Abuse and Enforceability of Non-Compete and No-Poach Agreements. Economic Innovation Group.