U.S. authorities are increasingly scrutinizing noncompete
provisions made part of employment agreements, with close focus on
provisions restricting junior-level and low-wage employees. Common
in technology firms, which frequently deal with proprietary
information, noncompetes are becoming more common in other
industries and increasingly appear in agreements with lower-level
employees.
Noncompetes are restrictive covenants that require employees not to
work for an employer's competitors after resigning or being
terminated, often for a specific term, typically six months to two
years, and often within a certain geography, typically tied to
where the employer operates, such as within some number of miles
from the employer's site or where its customers are
located.
Employment noncompetes limit where an employee can work, so they
may be challenged as an unreasonable vertical restraint under the
antitrust laws. Because employment noncompetes typically affect
only a small number of employees in any area, they often are
challenged under state competition or labor laws. (Agreements
between firms not to compete for each other's employees are
more likely to draw scrutiny under the federal antitrust laws as a
form of horizontal market allocation.)
As employment noncompetes have become more common and are
increasingly being with used junior-level employees, they are
drawing more scrutiny:
- A May 2016 White House report questioned the use and effects of noncompetes.
- In mid June, legal publication Law360 agreed to stop using and enforcing noncompetes with current and former editorial employees in order to resolve an investigation brought by the New York Attorney General.
- Earlier in June, the Illinois Attorney General brought an action against sandwich chain Jimmy John's for requiring front line workers to enter into noncompete agreements, after a federal district court held that named plaintiffs lacked standing to challenge the noncompetes in a putative employee class action.
- Federal legislation, the Mobility and Opportunity for Vulnerable Employees (MOVE) Act, which was proposed in 2015 but is not expected to pass into law, would prohibit noncompetes for employees earning less than $15 per hour.
- Some states limit the use of noncompetes. Employment noncompetes are generally invalid in California, North Dakota, and Oklahoma. Proposed Massachusetts legislation would make interns, employees under 18 years of age, and hourly employee exempt from noncompetes.
Noncompetes can benefit competition. Used reasonably,
noncompetes can facilitate free exchange of sensitive information
within firms, without employers worrying that employees who change
jobs will take its proprietary information to a competitor.
Noncompetes also can encourage firms to provide better employee
training by reducing the risk that employees will take their
newfound skills to a competitor.
On the other hand, noncompetes have historically been questioned
because they limit an employee's ability to practice their
chosen field and they can restrict employee mobility. In the view
of the White House report:
Workers' value comes in part from the skills and experiences gained on the job. Non-competes can reduce workers' ability to use job switching or the threat of job switching to negotiate for better conditions and higher wages, reflecting their value to employers. Furthermore, non-competes could result in unemployment if workers must leave a job and are unable to find a new job that meets the requirements of their non-compete contract.
Recent scrutiny of noncompete agreements grows out of their use
among employees who may not have access to a firm's carefully
guarded secrets or specialized skills. The White House report
states 15% of workers without a college degree and 14% of employees
earning less than $40,000 per year are subject to noncompetes,
including some fast food employees, warehouse workers, and camp
counselors. Under these circumstances, employee mobility may be
restricted without any clear procompetitive benefit.
Of course, authorities may worry more about the inequities of
noncompete agreements than their competitive effects. Limiting fast
food workers' next employment may not benefit competition, and
there may not be sufficient consideration to compensate employees
for the restrictive noncompete covenants. States vary over what
consideration they consider acceptable, ranging from none to
continued employment to two-years continued employment.
To avoid the increasing noncompete scrutiny, employers should use
noncompetes only where their use reasonably could facilitate
procompetitive benefits, such as with employees given access to
trade secrets. By the same measure, employees should avoid
requiring noncompete agreements from employees who do not have
access to sensitive information or specialized knowledge or skills
learned from the employer.
Employers should use noncompetes narrowly to protect legitimate
business interests, tailoring noncompetes to be commensurate with
the interests the agreements are intended to protect. At the same
time, noncompetes should not be used to punish departed employees.
In particular, noncompetes that are broad in time, lasting more
than two years, or territory are more likely to bring scrutiny and
may not withstand challenge.
Alternatively, employers can use other means to protect proprietary
information. Confidentiality agreements can be used to limit
communication or use of trade secrets in later employment.
Intellectual property assignment agreements can be used to protect
information and processes. These devices can protect an
employer's secret sauce without restricting employee
mobility.
Employers should consult with antitrust and labor counsel before
establishing noncompetes to limit liability and ensure their
noncompetes and other employments agreements are permissible.
The White House Report on Non-Compete Agreements can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.