There Might Be a Better Way to Keep Your Low-Wage Workers than a Non-Compete Agreement…

Low-paid but highly valued employees are driving some employers to take questionable measures to ensure their loyalty. While non-compete agreements are common for highly-skilled, in-demand professionals in IT and health care, it is rare for an hourly, unskilled worker to be asked to sign one.

However, when reports emerged last year that the casual restaurant chain Jimmy John’s was binding former low-wage employees to non-compete agreements, the practice drew the attention of lawmakers. The agreements prohibited employees from working for two years at any food service venue that derived 10% or more of its revenue from the sale of “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” within three miles of a Jimmy John’s location.

U.S. Senate Democrats recently introduced a bill that would amend the Fair Labor Standards Act to prohibit the use of non-compete agreements for low-wage employees. In using the same definitions from the FLSA for “employee” and “employer,” the bill would simultaneously require employers who employ any low-wage employee to post notice of the bill’s provisions in a conspicuous place on their premises.

The bill, known as the Mobility and Opportunity for Vulnerable Employees (MOVE) Act, would define “low-wage employees” as hourly employees making less than $15 per hour, or the applicable state or local minimum wage, whichever is greater, or salaried employees making $31,200 per year or less.

In addition, the Act would contain a requirement for employers to disclose the requirement of signing a non-compete agreement as a condition of employment to employees who are not low-wage workers prior to employment and at the beginning of the hiring process.

Given the possibility that non-compete agreements for low-wage workers may subject employers to unwelcome scrutiny, the question becomes whether such measures are necessary or even helpful for the employer. Brad Ingram, a partner and chair of the Employment & Labor Practice at Heyl, Royster Voelker & Allen in Peoria, Ill., spoke with Bloomberg BNA on this issue.

Bloomberg BNA: Why are employers such as Jimmy John’s requiring their low-wage workers to sign non-compete agreements as a condition of employment?

Ingram: Reasons for non-compete agreements for low wage workers could include an employer’s time and resources spent training employees and their overall investment in the individual employee. Employers would prefer not to lose employees to a competitor after a significant effort to train those employees and also want to minimize attrition.

Bloomberg BNA: Is there a history of low-wage workers creating competition problems for their former employers by switching to a competitor or working for a competitor after being fired/laid off by the original employer?

Ingram: Non-compete agreements require an employer to establish a legitimate business interest that needs protection. It is not clear that low wage workers actually create competition problems for former employers by switching to a competitor. Non-competes should not impose undue hardship on employee nor should they affect the public in a negative manner.  

While the Jimmy John’s geographic radius was very small (3 miles), Jimmy John’s may have difficulty establishing a legitimate business interest for a non-compete agreement. The Jimmy John’s case did not result in a ruling on the merits of the non-compete agreements. Jimmy John’s was able to get [that portion of] the case ( Brunner v. Liautaud, No. 1:14-cv-05509, N.D. Ill.) dismissed based upon a lack of standing, and actually submitted affidavits indicating they would not enforce the confidentiality and non-compete agreements against the plaintiffs in the future.

Bloomberg BNA:What trade secrets would a low-wage worker potentially (and realistically) be privy to that would shift the competitive balance so much that an employer would feel compelled to enforce a non-compete agreement?

Ingram: Low wage workers would likely not have access to trade secrets that would shift any competitive balance, however those facts would be determined on case by case basis depending upon the nature and extent of the employment relationship. Jimmy John’s would likely have difficulty establishing some trade secret and that they have made an effort to protect it with regard to their low wage employees. Such employers would need to assess the degree to which they want to proceed with enforcement of such a non-compete agreement. 

Bloomberg BNA: What arguments do employer-side litigators make in favor of these agreements (in other words, how do they argue that the agreements are NOT unconscionable and unreasonable)?

Ingram: Each employer needs to consider whether a covenant not to complete is actually necessary and whether it should cover all or just certain employees. Employers should determine whether they would be comfortable arguing in support of a non-compete and actually seeking enforcement in circumstances similar to the Jimmy John’s case. While employers could make the argument, I doubt that consideration of attrition and the cost of employee training for low wage workers would be sufficient for an employer to establish that a non-compete was not a hardship on the employee and was in furtherance of a legitimate business interest that needed protection.

Bloomberg BNA: In what situations have courts found these types of non-compete agreements to be enforceable on low-wage workers? How were the agreements typically structured?

Ingram: The courts have found non-competes to be enforceable where employers establish a good reason for confidentiality and the existence of a trade secret that the employer has made a substantial effort to protect. Employers need to periodically review their non-compete agreements and confirm that such non-competes continue to be necessary and are the types of agreements that they are willing to proceed to court to enforce. Successful non-compete agreements must be structured carefully and address the elements required by the court for enforcement.

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