Theory and Evidence on Employer Collusion in the Franchise Sector

Abstract

In this work we study the role of covenants in franchise contracts that restrict the recruitment and hiring of employees from other units within the same franchise chain in suppressing competition for workers. On the basis of an analysis of 2016 Franchise Disclosure Documents, we find that “nopoaching of workers” agreements are included in a surprising 58 percent of major franchisors’ contracts, including McDonald’s, Burger King, Jiffy Lube, and H & R Block. The implications of these no-poaching agreements for models of oligopsony are also discussed. No-poaching agreements are more common for franchises in low-wage and high-turnover industries. A postscript explains that as a direct result of an early draft of this paper many, if not all, franchise no-poaching agreements have been forcibly abandoned because of actions by the Washington State Attorney General and others.