FRANCHISOR 101: Non-Competes for Franchisees’ Employees

Lewitt Hackman
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Lewitt Hackman

A "non-compete" provision limits the franchisee's ability, after the franchise agreement ends, to continue to work in a similar type of business to the franchise within a certain time period and geographic area. The purpose is to protect the franchise system for a time against a competitor who "knows the system from the inside." Non-compete provisions are often disfavored by courts. What about non-compete agreements for the employees of franchisees?

Until recently, Jimmy John's, a franchisor of sandwich shops, provided its franchisees with sample non-compete agreements for franchisees to use with their own employees, including order takers, sandwich makers, and delivery drivers. The agreements stated that, for two years after leaving employment, a former employee could not work at any business within a 2-mile radius of a Jimmy John's location if that business made more than 10 percent of its revenue from sandwiches.

However, last June Illinois Attorney General Lisa Madigan filed suit against Jimmy John's to stop this imposition of "unlawful" and "highly restrictive" non-compete agreements on its low-wage workers. Illinois requires that non-compete agreements be "premised on a legitimate business interest and narrowly tailored in terms of time, activity, and place." The complaint alleges the agreements lock these employees into their jobs and prevent them from seeking higher-paying jobs elsewhere, while giving their employers no reason to increase their wages or benefits.

Shortly thereafter, New York Attorney General Eric T. Schneiderman announced that his office reached a settlement with Jimmy John's regarding the agreements, stating that "Non-compete agreements for low-wage workers are unconscionable." Under the settlement, the franchisor will stop providing the sample agreements to its New York franchisees and will also inform those franchisees that the Attorney General considers such agreements unlawful and void.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.

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