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.