In our franchising practice here at Denton Peterson, we are seeing more and more franchisors
who make franchisees sign confidentiality agreements and non-competition agreements.
Usually the main reason to ask for those agreements is to protect the franchisor's trademark
and other intellectual property.
Franchisees also sometimes make their employees sign confidentiality agreements and non-compete
agreements, including non-competes that are valid after the employee is terminated.
These agreements can be really valuable in protecting your brand and your goodwill—but
they can also be dangerous if they're overused or used wrong.
The trick is knowing when and how to use this type of agreement.
Most franchisors have some kind of trademark.
In order to protect a trademark, the owner has to be vigilant in protecting that mark.
Under the law, use of the trademark has to be policed adequately to guarantee the quality
of products sold under the mark.
Noncompete agreements and confidentiality agreements are some ways that trademark owners
can police their marks.
That's a legitimate purpose under the law.
Over the past several years, we've seen more and more franchisees and franchisors
applying these sorts of restrictive covenants to low-end workers, like cashiers and food
prep workers.
In most cases, those workers are at a pretty low risk of poaching, and they don't have
access to trade secrets or confidential information.
So there's a question whether those noncompete agreements and confidentiality agreements
are really needed.
In fact, some people argue that using those kind of agreements for low-wage workers is
just a way for franchises to restrict competition and keep wages low.
In a recent case about noncompete agreements, the states of New York and Illinois came down
on Jimmy John's, the sandwich franchise.
The Jimmy John's agreement said that sandwich makers couldn't work at any other company
that earned more than 10% of its revenue from making sandwiches.
And that restriction applied within two miles of any Jimmy John's store anywhere.
The states brought an enforcement action against Jimmy John's saying basically that those
restrictions were too broad, and that they weren't really needed to protect Jimmy John's
business interests.
They came down pretty hard on Jimmy John's, and Jimmy John's had to agree not to enforce
those agreements and not to include them in employment contracts anymore.
You may have also heard about the concept of joint employers.
That's the concept that a franchisor and franchisee could both be considered legal
employers of employees who work at the franchisee.
This happens when the franchisor exercises certain types of control over the franchisee's
employees.
So if the franchisor has enough control over the terms of employment for those employees,
the franchisor might be liable for labor and employment violations that happen.
Along those lines, the National Labor Relations Board recently ruled that a franchisor could
be a joint employer if it has sufficient control over the terms of employment to permit meaningful
bargaining.
In other words, the question is whether a franchisor could make a deal with an employee
union, and then tell the franchisee it has to follow that deal.
To decide whether the franchisor has that kind of control, you have to look at the actual
relationship, but also what the franchise contract says.
And that means that in certain cases, a franchisor might have to come to the bargaining table
to negotiate with a franchisee's employees!
I can pretty much guarantee that none of our franchisor clients want to be involved in
that.
And that's a reason for a franchisor not to require every single franchisee employee
to sign noncompete and confidentiality agreements.
Because that requirement would help show that the franchisor has sufficient control over
the terms of employment to permit meaningful bargaining—which means being a joint employer
and all the liability that comes with it.
There are a couple take-away principles here.
First, don't be eager to have every single employee sign noncompete agreements and confidentiality
agreements.
Make sure they're only required of essential personnel, and make sure they're narrowly
tailored to the needs of the company and the employee's job.
Second, make sure you have a franchise lawyer who understands the principles related to
joint employers.
You don't want to get tripped up on this principle and find out that you're responsible
for a bunch of employees you've never seen.
A little planning can prevent a huge joint employer nightmare.
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