Franchise owners are colluding to suppress Minnesota workers’ wages
The Legislature can put a stop to it
Photo by Jeenah Moon/Getty Images.
In many Minnesota franchises, franchise owners within the same franchise agree not to hire from each other, keeping wages down and profits up. It is already illegal for non-franchise business owners to use this anti-competitive strategy to limit workers’ freedom. Minnesota legislators are moving to close a franchise-owners loophole, via bills (SF2216/HF1831) championed by Rep. Emma Greenman, DFL-Minneapolis, and Sen. Alice Mann, DFL-Edina.
In no-poach or no-hire agreements, a group of employers collude to not recruit or hire each other’s workers. For instance, Sbarro corporate required anyone who wanted to develop a Sbarro franchise to agree to this:
With that, all Sbarro franchise owners knew that no other Sbarro franchise owner would offer to hire their current or former workers. In 2016, research uncovered that 58% of corporate franchisors used these kinds of restrictions, up from 36% in 1996. Some examples include AAMCO Transmissions & Total Car Care, Burger King, Buffalo Wild Wings, H&R Block and Sport Clips salons.
Employers forge these agreements about workers’ careers without workers at the table. Workers generally don’t know the agreements exist.
It may seem easy for a franchise worker to find another, similar job, but these collusive franchise agreements take away the very outside opportunities for which a worker is best suited.
When a worker’s life changes, they may want to use their experience to get a job in the same chain but in a different location, closer to their kid’s new school or their aging parent’s home. Or maybe another location is paying a couple dollars more per hour. The worker will proudly list their prior work experience in the chain on their application, hoping to signal relevant expertise and loyalty. But, given a collusive agreement within the franchise, when the owner sees the applicant’s work experience, they will throw the application in the garbage. All the worker will know is that they didn’t get the job.
As a result, franchisees do not have to compete with each other for talent.
What does it mean for workers? After franchise no-hire agreements came to light in 2016, the Washington State attorney general started cracking down on franchises that used them. Recent research revealed what happened: Workers’ earnings grew 4% faster among those franchises that were forced to stop colluding versus in other franchises that already did not use them.
The affected workers typically earned about $26,000 a year. Removing the collusive agreements led typical employee earnings to rise by more than $1,000.
In 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 other’s employees. The U.S. Department of Justice investigated and tried to stop the collusion. An economist found that just one agreement between two of these firms reduced employees’ wages by 2.5% on average. In other words, wages increased faster in firms that were colluding after the crackdown, compared to similar firms who were not colluding over this time period.
Finally, consider some of the rationale offered by advocates for these restrictions. They say, for example, that we have trouble with retention already or that we might lose investments in training.
We should be skeptical of these types of arguments. 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. Workers don’t know about them.
Instead, if you want to retain workers, raise your pay or make your jobs better. And training is a two-way street: If an employer always has to hire somebody from outside the franchise, they will always have to invest in more training. But if a worker trained at some other store wants to leave, then the best fit for that worker is another store within the franchise.
In an extreme case, the franchise could also offer a contract that offers training with a clawback provision. This at least gives the employee the opportunity to know what they are getting into.
The Silicon Valley no-poach agreements between employers is already illegal under the federal Sherman Act. But franchise agreements to not recruit or hire from other franchisees or the franchisor is a legal gray area. Franchise employers’ collusion meaningfully harms their Minnesota workers’ earnings.
This bill would close a loophole and bring the treatment of franchises into alignment with laws forbidding inter-employer anti-competitive agreements.
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