Michael S. Powers

Michael S. Powers Associate

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Jimmy John’s to Drop Non-Compete from Employee Contracts in New York

Many businesses find non-compete agreements to be useful tools to protect their workforce investments.  In some industries they may be absolutely vital to ensuring that employees don’t build relationships with clients at the employer’s expense only to then steal them away.  But what about the use of non-compete provisions for less skilled, less specialized employees?  Many were surprised recently when Jimmy John’s sandwich shops made news with the story that it would require store employees to sign non-compete provisions.  Some may have wondered whether it was really necessary to protect a workforce asset at the level from competitors.  Others may have wondered if it was even worth the trouble of the inevitable challenges that such a provision would bring, let alone the cost of actually enforcing these provisions.  Well, those challenges mounted and the company has ultimately relented.

Laws regarding the enforceability of noncompete clauses vary widely by state.  Some states won’t honor them at all, viewing them as restraints on trade.  Other states view the issue as a matter of freedom to contract and generally will enforce such restrictive covenants.  Most states allow such agreements but only to the extent that they are reasonably restricted both in time and geographically and only to protect a real interest of the company.  Jimmy John’s noncompete clause restricted an employee from working for a competing sandwich seller for two years after leaving employment with the company.  It defined a competing sandwich seller as a shop that made at least ten percent of their revenue off sandwiches and was located within three miles of a Jimmy Johns location.  The reasonableness of time and geographical restrictions are typically held to depend upon the nature of the business.  Two years is not particularly long and three miles seems very reasonable, as non-compete clauses frequently state restrictions of fifty miles, one hundred miles, or more.  However, the prevalence of Jimmy John’s franchises means that being barred from working for a competitor within three miles of any Jimmy John’s might put an employee out of the sandwich business altogether.

In the end, it wasn’t just the geographical concerns that invited trouble for Jimmy John’s, it was something more fundamental.  Speaking about this case, the New York Attorney General said “[n]oncompete agreements for low-wage workers are unconscionable.”  That’s a novel and far-reaching argument.  If true, at what point in a wage structure does such an agreement become conscionable?  Moreover, who gets to make that decision if not the person entering into the contract?  Even so, the New York AG believes that such agreements hurt workers who are vulnerable due to their relatively low wages, and could hinder their ability to leave poor working conditions or to find subsequent employment if they left or were fired.  It could also prevent them from leaving for better wages and could theoretically suppress wages on a larger scale as a result. For these reasons the New York AG brought an enforcement action against Jimmy John’s over these agreements.

Jimmy John’s never mandated this policy, but rather left it up to individual franchise owners.  It did, however, include the agreement in hiring packets that it sent to franchisees.  In the end, Jimmy John’s agreed not to support the enforcement of non-compete agreements against store employees.  The company released a statement saying it was happy to have reached a settlement and praising the attorney general’s professionalism.  If this minor issue can be deemed a defeat then the company was certainly gracious about it.  Jimmy John’s agreed to communicate with its franchisees that the agreements were disfavored by the state of New York and to suggest that they should void the agreements.  Because it was the individual franchisees who had entered into the agreements, the ultimate decision of whether to void the agreements, or even of whether to seek enforcement in spite of the Company’s position, will be up to the owners of the individual stores.

Finally, it should be added that while the settlement agreement at issue here specifically addresses only Jimmy John’s stores in New York, we may yet see it implement this change in policy on a wider scale.  Or, maybe it already has.  Earlier in June the Illinois Attorney General sued Jimmy John’s over exactly this issue.  In response, the company said that it had actually abandoned the position in 2015.  It appears that the company may have stopped distributing the materials and suggesting the practice to franchise owners, but that it had not notified franchises about the change in policy.  The company also noted that a Federal complaint against it was dismissed in April of 2015 on the grounds that the agreements were unlikely to be enforced.  However, the dismissal of a federal claim in no way prohibits state attorneys general from proceeding against the company if they see fit to do so.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters, including the drafting of employment agreements, for almost sixty years, and are available to discuss these issues and others.  As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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