As an employment lawyer for organizations large and small, I hear this common refrain: “I need an ironclad noncompete that stops my employees from running away with my business.”
Not so fast!
But why? This seems reasonable, right?
Well…it depends. I know, you hear that a lot from lawyers. There are other interesting restrictive covenants you’ve heard of like confidentiality provisions and nonsolicitation clauses, but let’s focus on the noncompete for a minute.
What exactly is a noncompete?
Simply put, a noncompete is a type of restrictive covenant. Breaking that down further, it’s a provision that restricts an employee or contractor from some type of action. Typically, a noncompete clause in an employment agreement restrains an employee for a period of time after she leaves the organization from joining a competitor.
Often, a noncompete provision decrees that an employer may file an injunction against the former employee or contractor from starting a new job within a certain distance from the company or its officers. As Fortune explained, the threat of a court filing against even middle-tier wage earners often deters them from taking such jobs, even if courts often decline to enforce the agreement or its terms aren’t legal in the state in which it’s operative.
In Virginia and the District, where I am barred, a noncompete may be enforceable only if it is narrowly drawn to protect the employer’s legitimate business interests, does not unduly burden the employee’s ability to earn a living, and does not violate public policy. Courts allow organizations to protect their customers and clients from former employees but only within a set framework—duration of the noncompete, geographical scope, and scope or function— and depending on the facts and circumstances of the case.
Overly broad noncompetes need not apply.
In recent years, it has become harder and harder to enforce these agreements. Courts are no longer fans, and state attorneys general are cracking down on them, finding that employers require all manner of employees to sign them regardless of whether or not the employer would actually have a legitimate interest in restricting that employee and, as a result, employees face a Catch-22— accept their next gig in industries in which they have experience or face a lawsuit.
So what’s the problem?
As my partner Rich Cohen noted earlier this year, it seems like noncompetes are being required of not just high level managers or high-tech employees, but even clerks and fast food workers.
Rich told us here, that both Hawaii and New Mexico banned noncompetes for certain workers, and Oregon and Utah have limited the duration of noncompete arrangements. Just recently, Massachusetts passed a law, which goes into effect on October 1, 2018, vastly regulating the use and enforcement of noncompetes by, inter alia, limiting them to a maximum duration of one year, and, absent a contrary agreement, requiring employers to pay 50% of the former employee’s base salary – termed “garden leave” pay – during the restricted period, among other constraints.
And in California, noncompete agreements are void entirely. Employers may contractually protect confidential information and trade secrets, but no more than that. California’s law states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
Employers are not happy. But they do seem to be listening.
What’s Happening with WeWork
This week, WeWork, the company that rents shared office space, agreed with the New York attorney general that it would discontinue the noncompete agreement it has required its employees to sign. As the New York AG noted, separately, but concurrently, the Illinois Attorney General began its own investigation into WeWork’s use of noncompetes. New York and Illinois worked together to reach a coordinated resolution of the two investigations.
The NY AG told us here that the settlement affects WeWork’s 3,300 non-executive employees, and it closes the investigation in Illinois.
Under the settlement, WeWork will eliminate the noncompete for more than 1,400 employees, many of whom work in custodial positions earning as little as $15 an hour. For about 1,800 workers with managerial duties or specialized skills, a revised noncompete reduces the exclusion from 12 to 6 months, the geographical area from “region” to within a 15-mile radius, and specifies lines of business that are considered competitive.
Duration, geography, function of the business. Sounds familiar, huh?
This news arrives on the heels of last week’s broadcast—Washington State’s attorney general settled with Burger King, Papa John’s, Denny’s, and five other fast-food chains to eliminate noncompetes in all of their US locations. And that comes on top of national settlements with fifteen other chains, according to the Fortune article.
Will this growing trend to eradicate, or at least limit, noncompetes continue? It seems likely.
Are there ways to draft fair, narrowly tailored noncompetes to protect your actual, protectable interests where you do business?
You bet. But only for workers who actually can run away with your entire business. Leave your fry cook, janitor, or mailroom clerk alone.