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Limiting Non-Compete Agreements is Key to a Just Recovery

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Najah Farley

As tens of millions of workers—more than one-fifth of the U.S. workforce—were losing their jobs at the start of the pandemic, worker advocates sounded another important alarm: In many states, being laid off would not release workers from “non-compete” agreements they had signed with their employers, which would restrict what future job offers they could accept.

The prospect that employers could hamper workers in their return to work by using non-competes seemed like a far-off possibility in March 2020. But now, with many seeking to return to work, the possibility of workers being bound by past non-compete agreements or agreeing to new ones is deeply concerning. Non-competes limit workers’ power and autonomy and exacerbate existing inequities that disproportionately harm workers of color.

What Are Non-Competes?
Non-competes are contracts, signed by employees when they accept a job, that restrict them from taking a job in the same industry for a set period of time after they leave their position. Restrictions may be defined by industry or geography, and some may list specific rival competitor companies that employees are prohibited from joining. Research suggests that nearly one in five U.S. workers is currently bound by a non-compete. The types of workers bound range from chief executive officers to security guards to sandwich makers, as in the infamous Jimmy John’s case that first brought this issue to the fore.

Nearly one in five U.S. workers—from CEOs to security guards to sandwich makers—is currently bound by a non-compete.

Employers usually present non-compete provisions in a “take it or leave it” fashion. They may require workers to sit out of the labor market for a year or even longer. Not surprisingly, non-competes have been shown to depress wages by reducing competition. This is what economists refer to as the problem of monopsony, where employers have greater market power and are able to continue to offer lower wages due to lack of competition.

Non-competes may exacerbate the wage gap that workers of color face.

Push for State Reforms
Many legislatures are successfully taking on the challenge of non-compete reform. New laws have been passed or are advancing in several states. Bills were introduced in West Virginia, Minnesota, Connecticut, Colorado, New York, and Iowa. In New York, Governor Kathy Hochul included a non-compete provision in her budget proposal, and the State Senate also introduced a bill. Both the West Virginia and Iowa bills proposed banning non-competes for workers in low-wage industries.

Many legislatures are successfully taking on the challenge of non-compete reform.

The Minnesota non-compete proposal would limit agreements to an annual salary equal to the median family income and also provide for “garden leave”, i.e., an employer would have to pay 50 percent of the employee’s highest annual base salary during the restricted period. Connecticut’s bill, had it passed, would have set the non-compete threshold close to $100k. Colorado’s bill would be an important improvement of the state’s previous non-compete law. Although many legislative sessions ended without passing the non-compete laws under consideration, the bills in New Jersey, New York, and Colorado are still being considered.

Movement Nationally
President Biden’s initiative to improve competition through his Executive Order on Competition, released on July 9, 2021, has also helped fuel the push for these bills. As a result of this directive, federal agency work in the area has increased.

On March 7th, the Treasury Department, in partnership with the Labor Department, the Justice Department, and the Federal Trade Commission (FTC), released a report on “The State of Labor Market Competition.” The report found that the lack of competition results in wage declines of between 15 and 25 percent. It also highlighted the power differential that exists between companies and workers, based on information asymmetry as well as labor market forces, that leads to employers exerting market power and offering lower wages and worse working conditions. Now that the FTC has a full complement of commissioners, advocates are pushing for the agency to pursue rulemaking in this area. The Open Markets Institute initially submitted a petition to the FTC in 2019, joined by 60 signatory organizations, including NELP.

Coercive waivers, such as non-disclosures, arbitration agreements, and non-competes, work together to reduce worker power.

Where We Go From Here
In the wake of the “Great Resignation,” management-side lawyers have become even more aggressive in their tactics to keep employees bound by these coercive agreements. In a recent blog post on a human resources site, management-side lawyers stated that they have seen an uptick in employers wanting to sue employees because of the talent shortage; they not only want to retain the employees but also prevent them from going elsewhere. Such articles highlight the abusive way in which non-compete agreements are used to block workers from going elsewhere to use their talents and skills.

In the wake of the “Great Resignation,” management-side lawyers have become more aggressive in their tactics to keep employees bound by coercive agreements.

State law advocacy will hopefully help level the playing field for workers seeking to be free from onerous non-compete agreements imposed by their employers, but advocates still have more to do.

While many states are moving in the right direction, federal legislative reform and rulemaking remain crucial.

The Workforce Mobility Act, sponsored by Senators Chris Murphy (D-CT) and Todd Young (R-IN), would eliminate non-competes for the majority of workers, keeping them only for workers involved in the sale of a business. This bipartisan bill would go a long way toward ensuring that workers can chart their own careers; it would take power away from employers that abuse the use of non-competes. A federal bill that bans non-competes for workers could, like Oregon’s non-compete law, have a positive impact on the wages of hourly workers. Now is the time to continue to push for broad non-compete reform, creating the just recovery that workers need.

This blog is a shortened version of one that originally appeared in full at NELP on May 19, 2022. Reprinted with permission.

About the author: Najah Farley is a senior staff attorney at NELP, who focuses on workplace standards and wages.

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You Can’t Compete With Me The…Legality of Non-Compete Agreements

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micheal helfandMillions of Americans wake up every day, get dressed in business attire, and head to work- only their “job” these days is actually looking for one. Unemployment rates are still hovering around 9.6% nationally, making this job market highly competitive and hard to crack into. Employers know this, and in a lot of ways, the sheer volume of applicants per job gives them the ability to exclude benefits, cut salaries and make demands that are sometimes not only unfair, but illegal.

One such demand that employers are placing on new-hires is that they sign a non-compete agreement. A non-compete is a document that restricts where and who you can work for should you be fired or quit.  Is that legal and should you sign it?  In a few states, they’re generally not legal. For example, in California, a non-compete agreement is enforceable only if someone sells a business and agrees not to compete with the new owner. That aside, California employers cannot restrict the livelihood of their current or former employees. For most other states the short answer to are non-competes legal is yes-however, the agreement has to be “reasonable” to be legal and upheld in court. Before signing, there are some things you should look for within the agreement itself before signing.

·  Did you get something for it?  A non-compete must be supported by consideration.  This means that it needs to be part of your employment agreement, or if you are already employed, you need to be given some other benefit for agreeing to this extra restriction.  This can be a change in status, a raise, a longer term on your contract, or some other tangible gain for you.

·   Is such a restriction necessary for this employer?   In many states, a non-compete should only be used where there is a legitimate interest to protect.  Does your employer have some confidential information that they have worked hard to create and to maintain?  Does your employer have customer lists built over time that are significant and stable relationships?  If the answer to both is “no,” then there likely is no reason to have a non-compete restriction.

·  Is the non-compete period of time reasonable?  The time period you are restricted from competition with your former employer should be related to the amount of time it took to develop the confidential information or customer relationships.  Most courts have found restrictions reasonable where the time period was connected to the time it took to start to receive revenue from the customer relationship, for example.

·  Is the geographic area reasonable?  Similar to the time restriction, many courts will generally find the geographic restriction reasonable if it is limited to those areas where you have established relationships on behalf of the employer. Even if your employer’s business has a larger geographic area than your personal work covered, a non-compete is more likely to be upheld if it only restricts the area you personally had involvement. If your work covered the city of Chicago and the surrounding suburbs, it could be unreasonable to be restricted from your profession in a 100-mile radius around downtown Chicago.

·  Are you being restricted from activity that is reasonable?  Your employer should only restrict you from those activities that are necessary to protect the business interest, so that you are not unfairly competing.  Non-competes that tried to restrict an employee from working at all for a competitor are generally held to be unreasonable in most states.  Instead, the employer should have narrowly tailored the restriction to just those activities which directly compete with your former employer.

The good news is, now you know your rights and can arm yourself with good information so that you can negotiate any non-compete you may be asked to sign. The bad news is, some employers know that their non-compete agreements toe the line of unreasonable, hence illegal- but they do not care. They will try to get you to sign on the dotted line any way by refusing to hire you if you do not. It is the very definition of being between a rock and a hard place when you are unemployed. If you find yourself in this position, first know you have legal recourse as courts frown upon companies who participate in this behavior. Secondly, you must ask yourself if this is the kind of company you want to work for? If they are using scare tactics to get you to sign an unreasonable non-compete, what else will they do once you are employed and dependent on your paycheck?

About the Auhor: Michael Helfand has been a Chicago attorney since 1997 with a focus on trying to change the way people find attorneys and legal information. In 2001 he launched  a state wide network of like-minded attorneys who talk in plain English, only pursue legitimate cases and fight for their clients. Mike recognized that the unique facts of the case should determine who the right lawyer is for a case. His network makes that goal a reality and the hundreds of lawyers he partners with state wide have achieved unmatched success for their clients.

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Non-Competition Agreements: Ten Cautionary Thoughts

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People do odd things when they enter into a new relationship. I call it the honeymoon period. It’s a time when it is all good, your vision is clouded by optimism that overlooks faults or problems that are visible to everyone else. Words of caution from well meaning friends have the sound of crazy alarmist rhetoric.  No, this post is not about relationship advice, it’s about the workplace. 

The same phenomenon occurs when a new employment relationships is started.  Employees are so happy to get the job with perceived infinite opportunities for advancement that they never pay attention to obvious signs that the relationship is not going to work. Obvious things like how is the company doing financially, how does it stand in relation to competitors,  the turnover rate , and how do present and former employees feel about the company.   Employers are guilty of the same thing.  They become so determined to fill a need that they do not spend the time checking background and references. They ignore obvious signs of a potential problem because the candidate says the right things in the interview.  Every employer and employee has the battle scars from these mistakes. Employees have told me of employers who brag about a fun and joking environment that really meant they would have to endure abusive superiors who took pleasure in berating them.  Employers have told me stories of the person who left them with an uneasy feeling but their resume and interview answers were exceptional so they ignored those subtle warnings that are indicative of an employee that will be a problem.

During this time, employers and employees make promises that they feel they never have to keep because they don’t envision this new relationship ever ending. One of those promises is the promise to be bound to a non-compete.  Most employers think a non-compete is an essential ingredient to protect their company, even though their real concern is confidentiality  or non-solicitation.  Employees view non-competes as “standard contracts” than everyone has to sign. If you take anything from this post, I want you to remember two things:  

1. There is no such thing as a standard agreement; and 
2. Everything is negotiable…everything.

With the recent economic downturn, employers are more likely to enforce a non-compete and less likely to look the other way, especially if you are considered to be top talent. IBM, Dell, HP, and Apple have recently been involved in very public disputes over the enforcement of non-competes. To the employee this can mean not getting that great job new job. It can mean having to pursue a new career path or having to move in order to get work.  
The truth is that employers and employees to think before they leap into a non-competition agreement. As a result, here are my 10 tips to consider before proposing or inking that non-compete.
1. Ask yourself what you are trying to accomplish.
Is the goal of the agreement to protect your confidential/proprietary information? If so, a non-compete may not be necessary. Instead, you should consider using a confidentiality agreement. Too often employers have not defined what they are trying to accomplish. The end result is they use a shotgun when a scalpel is sufficient.

2. Is the restriction reasonable?

States that enforce non-competition agreements are going to require the agreement to be reasonable in duration and geographic scope. What that means is that you are not going to a persuade a court to enforce a non-compete that lasts for eternity and prohibits an employee from working anywhere in the Milky Way galaxy. They will enforce an agreement that prohibits competition for 1,2 or 3 years in the geographic location where a company actually does business. Remember: Less is more. Prudent employers recognize that non-competition agreements that are narrowly tailored will less likely to be challenged in court. Translation. Less legal fees and a greater likelihood your objective will be achieved.

3. Employees: How you are going to get paid while the non-compete is in effect?

 A common complaint from employees is that the non-compete prohibits them from earning a living once they leave their employer. An employee signing a non-compete should consider asking their employer to pay them for the time that they are bound by the non-compete. Although some may think this is a radical idea, it offers distinct advantages to the employer and employee. For the employer, the prospect of having to pay a departed employee its wages has the effect of causing the employer to give serious thought to the duration and geographic scope of the agreement. In addition, by paying an employee during the period of non-competition, the employer has the contractual and moral high ground in the event it has to enforce the agreement. For the employee, it provides an income during the period of non-competition and thereby provides an incentive not to violate the agreement.

4. What happens if your company is sold or you are laid off.

Many employees signing non-competition agreement find themselves bound by that agreement after they are laid off or their employer merges with or is acquired by another company. The time to address these issues is at the beginning of the employment relationship while the prospect of a lay off, merger or acquisition is not on the horizon.

5. Where are you going to dance and what type of music will you be dancing to?

 Lawyers refer to this as venue and choice of law. Venue means the court that will hear any dispute over the non-compete. Savvy employers will insist that cases are heard in jurisdictions that are inclined to enforce non-competes. Choice of law is the law that will apply. Again, employers will insist on jurisdictions that favor enforcement of the agreement. Employees should exercise great care when it comes to venue and choice of law clauses. One of the worst things for an employee to encounter is having to defend against enforcement of or challenge a non-compete in another part of the country. This gives the party with the most money a distinct advantage.

6. Tell prospective employers about your non-compete.

 Many employees try to act like a non-compete does not exist. When the former employer alerts the new employer that the employee is bound by a non-compete, the employee acts surprised when they find themselves out of a job. It is always in the employee’s best interests to allow a prospective employer to view their non-compete. In that way, the new employer can have the agreement vetted by their legal counsel. In many instances, if legal counsel opines that an employee is not barred from working at a company because of a non-compete, the employer will agree to provide their employee with legal defense in the event the past employer seeks to enforce the agreement.

7. Tell your employer that you have accepted the new position.

 Transparency goes a long way. Many employees create problems by not being candid with their employer. Instead, they accept a position with a potential competitor. Once the former employer learns that the employee has accepted the new position, it immediately assumes the worst. Not only does this usually result in litigation, it also jeopardizes any possibility that the employee will be able to return to the company in the future.

8. Make sure you pay consideration to support the non-compete.

Many states require a non-compete to be supported by consideration. Talk to your lawyer to determine what is adequate consideration for a non-compete.

9. Figure out what it is that you need?

This goes back to item 1 which was what are you trying to accomplish. If you want to prohibit a departing employee from raiding your workforce or your customers then have them sign a non-solicitation agreement. If you are trying to protect confidential information such as customer names or other data your company treats as proprietary have the employee sign a confidentiality agreement.

10. Don’t forget about the UTSA and the employee’s duty of loyalty.

Once you, as the employer, define what it is that you are trying to protect, you will find that legal remedies exist that are designed to protect you. Many states, including Washington, recognize that a departing employee has a duty of loyalty to their employer until they leave. In addition, most jurisdictions recognize the Uniform Trade Secrets Act (UTSA) which has a strong enforcement mechanism.  Sometimes these existing legal mechanisms, are adequate to address your concerns.

Rod Stephens: Rod Stephens, of The Stephens Law Firm, brings a unique perspective to the table in that he counsels and represents employers and employees. This provides him with a keen insight into the manner in which employers and employees perceive work-related issues.
Rod is AV rated by Martindale Hubbell, has been recognized in the 2006 Martindale-Hubbell Bar Registry of Preeminent Lawyers, and has been selected as one of Washington Law & Politics magazine’s Super Lawyers from 2000 to 2007. Rod is a frequent speaker at seminars for legal and human resources professionals. To learn more about The Stephens Law Firm go to www.stephenslawfirm.com or Rod’s blog www.employmentadvisoryblog.com

This article originally appeared at Employment Advisory Blog on June 06.2009 and is reprinted here with permission from the author.

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