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The Economics of Jimmy John's "Freaky" Non-compete Clause

The Economics of Jimmy John's "Freaky" Non-compete Clause published on

Jimmy John’s, the national sub-sandwich company known for being “freaky good, freaky fast,” has been in the news for being rather freaky about having employees sign non-compete clauses as part of their standard labor agreements.

Non-compete clauses are not uncommon for senior executives, technology professionals, or professionals whose business is built on client relationships, like lawyers or sales representatives. And although an article in the New York Times this summer highlights how non-compete clauses are increasingly appearing in unexpected places, one certainly wouldn’t expect such an agreement as a condition of employment at a sandwich shop–unless maybe it was to protect the time-warp technology for their freak fast delivery.

There’s just one problem with the hype in the media around this issue: most of it is ignoring some important facts that call into question just how big a deal this is, except as a media stunt for some disgruntled employees. For example:

First, despite all the joking about sandwich makers having access to special trade secrets (as usual, The Onion nails it), the (former) employees bringing the lawsuit against Jimmy Johns are not sandwich makers–they are assistant managers. Sure, they make their share of sandwiches, but they are not just sandwich makers and delivery drivers. And, according to the Huffington Post report, the “oppressive” non-compete clause was an afterthought amendment to a claim for unpaid work hours (much like the case before the Supreme Court this week involving an Amazon order-fulfillment vendor).

Just how “oppressive” is this non-compete clause? Yes, it restricts employees from working for two years at “any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” within three miles of any Jimmy Johns in the country.  The plaintiffs’ lawyer in the class action suit exclaims that a high school kid from Illinois who moved to Tuscaloosa, AL, for college would be prohibited from working at any sandwich shop in town, since all are within three miles of (the two) Jimmy Johns in town. That sounds pretty oppressive, but for the fact that it’s not. There are more than 30 other fast food brands in Tuscaloosa, most with multiple locations, that would not be subject to the restriction. And that’s just the fast food industry.

If in fact sandwich makers are as unspecialized and unskilled as those crying “oppression” make them out to be (and as most people would agree), then prohibiting them from making sub sandwiches doesn’t impose any meaningful restriction on their ability to get a similarly low-skilled, unspecialized job working in any other industry as well. In short, to claim this is a serious restriction on sandwich makers is laughable by most any standard. Likewise, sandwich-making ability is not so specialized that would-be employees are forced into accepting Jimmy John’s non-compete terms out of necessity. In any market even for sandwich making, Jimmy Johns holds a pretty minor (even trivial) share of the employment opportunities. If a would-be sandwich maker is concerned about their future employment prospects, there are myriad other employment options with similar skill set requirements.

But the plaintiffs aren’t sandwich makers, they are managers. And the rest of the details in the non-compete clause (gasp, HuffPo ignored them!) show more of the intent behind the restriction. From the contract that HuffPo posted:

Employee also acknowledges and agrees that, for at least twelve (12) months after the effective date of termination of his or her employment for any reason, … Employee may not become a partner of or investor/owner with, or work for, another JIMMY JOHN’S Sandwich Shop franchisee.

Jimmy John’s was the 6th fastest growing franchise in the US according to Nation’s Restaurant News‘ 2014 Top 100 report. What’s the best way to get good management to open your new franchise? Hire someone else’s. By including a standard non-compete clause in the documents it provides franchisees, Jimmy John’s is giving local franchisees assurance that they will get a return on their investment in developing quality employees and not have other Jimmy Johns franchisees (or other chain operators) poaching their talent.

The fact that franchisees would value that kind of protection does indicate something about the quality of training Jimmy John employees receive. It also suggests franchisees recognize the potential free-riding of new franchisees on existing franchisees’ workers. This non-compete clause is the labor market equivalent of an area development agreement that allows local franchisees to invest in developing the brand in a local market without  fear of another store opening up to free ride on their investments.

Such contract terms are important for franchise operations, as a slew of economic research shows (see Lafontaine and Slade’s 2001 article in the Journal of Economic Literature for a broad overview). They help mitigate the principal-agent problems that persist between franchisee and franchisor.

So, are the Jimmy John’s non-compete clauses really oppressive or even all that freaky? No. They offer protection for local franchisees who may fear paying to train good talent and losing them to competitors in a rapidly growing, very competitive business. They have virtually no meaningful effect on the typical sandwich maker’s ability to find a job, whether with Jimmy Johns or not. If job candidates are concerned about their future employment prospects, they could easily seek a job with any of a number of other fast food stores. And that assumes any particular Jimmy Johns would ever even try to enforce the agreement–and there’s no evidence that it has ever happened.

Would it have legal legs if they did? That’s unclear, but likely not–at least not if the employee was a run-of-the-mill sandwich maker. But maybe, if the employee was a manger…or had the schematics for that freaky fast time-warp delivery machine.

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