Let Them Make Sandwiches
On December 7, 2016, Illinois Attorney General Lisa Madigan announced that Jimmy John’s Enterprises LLC and Jimmy John’s Franchise LLC had agreed to stop using highly restrictive noncompete agreements and to notify former and current employees that the agreements would not be enforced.
Noncompete agreements generally prohibit employees from working for a competitor or in a similar industry within a certain geographical distance and for a certain amount of time. Many people think that employers use noncompete agreements only for high-level employees who may take company secrets to their next job. But as Madigan’s announcement and recent federal reports illustrate, noncompetes can target low-wage workers and harm them the most.
The Jimmy John’s noncompete was not an isolated incident, but part of a pattern. In fact, a report on noncompete agreements issued in May 2016 by the White House, and one issued in March 2016 by the US Treasury Department, both showed that noncompete agreements affect 30 million (nearly 1 in 5) US workers, including many low-wage workers.
Jimmy John’s Noncompete Agreements
The Jimmy John’s noncompete agreement restricted employees during their employment, and for two years afterward, from working in any other business that earned more than 10% of its revenue from selling “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches.” The work restriction applied to any sandwich business located within three miles (under later agreements, within two miles) of any Jimmy John’s Sandwich Shop in the country.
Under the settlement with the Illinois Attorney General, Jimmy John’s agreed to stop requiring illegal noncompete agreements (including by franchisees), to notify affected employees that their noncompete agreements would not be enforced, and to pay $100,000 to the Attorney General’s Office for public awareness and education about the legal use and best practices surrounding noncompete agreements.
“This settlement helps ensure Illinois’ workers have freedom to change jobs in order to seek better wages, further their careers and improve their lives,” said Madigan.
Effective January 1, 2017, the Illinois Freedom to Work Act prohibits the use of noncompete agreements for “low-wage employees” who make less than the greater of $13 per hour or the local, state, or federal minimum wage. Sheppard Mullin partner Kevin M. Cloutier told the Cook County Record that noncompete agreements like Jimmy John’s probably weren’t enforceable even before the new Act, but were simply intended to have a “chilling effect” on employees who “still [think] they signed a non-compete and it prevents them from going to work for another sandwich maker, and that will unnecessarily restrict their mobility.”
Earlier in 2016, Jimmy John’s entered a similar settlement agreement with New York state Attorney General Eric T. Schneiderman, who called noncompete agreements for low-wage workers “unconscionable” and added:
They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued. Companies should stop using these agreements for minimum wage employees.
Schneiderman has also proposed legislation to “curb the rampant misuse” of noncompete agreements. Schneiderman says that his new bill will “ensure that businesses can hire the best worker for the job.”
White House Call to Action Concerning Noncompete Agreements
In October 2016, the White House issued a call to action asking states to stop the misuse of noncompete agreements. According to the call to action, “non-compete agreements should be the exception rather than the rule . . . there is gross overuse of non-compete clauses today.”
The White House asked state policymakers to pursue best-practice policy objectives, including banning noncompetes for particularly vulnerable categories of workers, requiring separate consideration for a noncompete to be enforceable, and encouraging the use of the “red pencil doctrine,” which entirely voids contracts with unenforceable provisions.
Noncompete Agreements’ Costs to Workers
The Treasury Department report on noncompete agreements notes that workers who sign them face costs such as reduced bargaining power, inducements to leave their occupations entirely, and reduced job churn, which in turn lowers labor productivity.
States are Examining Noncompete Agreements
As the White House Call to Action notes, noncompete agreements are generally not enforceable in California, North Dakota, and Oklahoma. Most other states limit the use of noncompete agreements in some way, such as duration, geographic scope, or which employees may be required to sign one. In addition, some states are examining whether noncompete agreements should be allowed for low-wage employees.
Politicians in some states worry about whether noncompete agreements hurt their ability to retain talented employees. For instance, politicians in Massachusetts are considering whether such agreements cause tech talent to flee to California and other jurisdictions where noncompete agreements are unenforceable. As reported in the New York Times, economist Evan Starr says that “Technical workers in Massachusetts would be paid about 7 percent more if the state’s noncompete practices mirrored California’s.”
The increasing scrutiny of noncompete agreements doesn’t mean that employers have no recourse when former employees move to a competitor. Nonsolicitation and nondisclosure agreements will generally be enforced.
Noncompetes Aren’t the Best Way to Make Employees Stay
Law professor Orly Lobel, author of Talent Wants to Be Free: Why We Should Learn to Love Raids, Leaks and Free Riding, told Inc.com that noncompetes, nondisclosures, and attempting to assert intellectual property ownership actually suppress employee motivation and creativity. Lobel calls these agreements “artificial barriers that make it harder to attract great employees” by de-incentivizing them from freely developing their careers and networks, which would ultimately benefit their employer.
According to its website, Massachusetts company Onshape recently got rid of noncompete agreements for most of its employees, effectively saying to competitors: “We don’t need an artificial mechanism to keep our best employees here. They WANT to be here.”
Instead of trying to hold on to employees with the threat of litigation, employers should focus on creating a workplace where employees feel engaged so that they want to stay. A culture of purpose is a better motivator for an employee than fear of unemployment. Studies have shown that employees who feel they lack freedom to grow and develop are more likely to become work martyrs than engaged, inventive, and productive employees.
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