In fact, there were a lot of developments in the world generally in 2016. The legal landscape when it comes to employers and employees was not any different. You have been hearing, reading, and re-tweeting all about the new Department of Labor overtime exemption regulations that were and then weren’t, and about how the Trump administration might impact various aspects of workplace issues. However you feel about November’s presidential election, you are likely still feeling the impact one way or another of identifiable pro-employee initiatives over the past eight years on the federal, state, and local levels.
One area that might not fly under the radar much longer involves restrictive covenant agreements. “Restrictive covenant” is a common umbrella term for several concepts, including provisions requiring confidentiality, non-competition, and non-solicitation (of both customers/clients and employees). For the most part, restrictive covenants have historically been the subject of private arrangements between employer and employee, with the judicial branch determining their enforceability when brought to its attention. Except in the rare case (i.e., California), restrictive covenants have not historically prompted the ire of the executive and legislative branches of government. Until now.
This article will summarize recent government initiatives that require your company to give careful consideration to your restrictive covenants as follows: whether and to what extent they can be used (1) between employer and employee as a matter of employment law principles; and (2) between one employer and another employer as a matter of antitrust principles.
The Pros and Cons of Noncompete Agreements
According to a recent report, approximately 18 percent, or 30 million, of workers in the United States are currently subject to a noncompete agreement whereby they are prohibited from working for a “competitor” after the termination of their employment. And another publication notes a 61 percent rise from 2002 to 2013 in the number of employees being sued by their former employers for allegedly violating noncompete agreements.
Clearly, noncompete agreements are being used and sought to be enforced. But why? Noncompete agreements are generally viewed as a deterrent to protect against employees jumping to work for a competitor and also as a deterrent against competitors poaching the company’s employees. Noncompete agreements are also viewed as another tool to protect competitively sensitive information from being disclosed or used outside of the employer’s organization. But increasing the number of bells and whistles in a noncompete agreement will not necessarily increase its enforceability, and could potentially backfire on the employer, particularly if they are used broadly and indiscriminately.
In fact, many companies have not considered the potential negative aspects of noncompete agreements. For one, they have the potential to negatively impact the ability to recruit top talent, while also reducing the morale of a workforce being asked to sign a noncompete agreement mid-employment without any additional consideration. There is also a significant cost attendant to creating the noncompete agreement initially and then seeking to enforce an agreement in court or through arbitration. Finally, there is an oft-ignored cost in instances where an employer has drafted the noncompete agreement and commenced legal action to enforce it, yet has received an adverse decision by a judge or arbitrator that serves as precedent for the rest of the employer’s workforce who have signed similar agreements.
Nevertheless, if companies have not considered the potential negative aspects of noncompete agreements, the government now has. 2016 has been a watershed year for the start and continuation of government efforts to regulate the employer-employee relationship. For example, there is a national trend toward paid sick leave, minimum wages have increased, and there has been a push for greater wage transparency and pay equity. Likewise, the government has taken aim at noncompete agreements and their perceived effect on employees and the labor market in general.
Government Involvement — Employment Law Considerations
Again, with certain exceptions, most jurisdictions have tended to enforce noncompete agreements when necessary to protect an employer’s valuable business interest, when the agreement is geographically and temporally reasonable, and when the interests of the employee and the public are not otherwise unduly harmed. However, in May 2016, the White House issued a report titled Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses. The White House report unabashedly characterizes itself as “a starting place for further investigation of the problematic usage of one institutional factor that has the potential to hold back wages — noncompete agreements.” Some might argue that the White House went into such investigation with a predetermined bias against noncompetes.
The May 2016 report identifies five principal problems with noncompete agreements as they tend to be used by employers: (i) even low-wage workers are compelled to sign noncompete agreements; (ii) workers have less bargaining power when asked to sign noncompete agreements after already accepting a job and giving notice of resignation to a prior employer; (iii) workers do not have a clear sense of the implications and enforceability of noncompete agreements they sign; (iv) workers are not given additional consideration for signing noncompete agreements beyond the promise of new or continued employment; and (v) employers tend to draft overly broad or patently unenforceable noncompete agreements, relying on the hope or expectation that a court will “blue pencil” the agreement if any part is ultimately deemed problematic.
The purpose of the May 2016 White House report appears to have been to set the stage for further action. Five months later, on October 25, 2016, the White House issued another statement, this time a “call to arms” to encourage states to take action where federal executive or regulatory action cannot necessarily succeed because noncompete agreements are generally a creature of state law. The White House’s October 2016 statement noted:
In adopting these strategies, states can help ensure that workers can move freely from job to job, without fear of being sued[.] … Even in states that choose to enforce noncompetes, we have heard from experts that only in rare cases are a noncompete the best option for an employer to use, over and above the host of other legal frameworks — including trade secret protections, nonsolicitation agreements and nondisclosure agreements.
State officials have heeded the federal call. For example, states like Oregon, New Hampshire, Massachusetts, and Illinois have joined California and others to enact legislation limiting the use of noncompete agreements and, in some instances, banning them outright. Other states, such as New York, Washington, and Idaho have proposed noncompete agreement legislation or announced that they will be doing so. For example, New York’s Attorney General has been very active in investigating and redressing unconscionable noncompete agreements through settlement agreements with major, national companies in the past year. He has also stated publicly that he will introduce legislation in New York in 2017 that will address the salary threshold required before an employee can be required to sign a noncompete agreement, requiring noncompete agreements to be provided before a job offer is extended, as well as extra consideration that must be paid and the permissible temporal scope of any restrictions.
It is imperative that your company become familiar with current, and any future, developments with noncompete agreements in the specific jurisdictions in which you do business.
Government Involvement — Antitrust Law Considerations
Worker mobility is not impacted only by noncompete agreements between employer and employee. Employers may also try to limit the ability of employees to leave the company by entering into agreements with other companies to not solicit or poach each other’s employees. According to new guidance issued jointly by the U.S. Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ), such a practice may have severe consequences.
On October 20, 2016, the FTC and DOJ released a document titled Antitrust Guidance for Human Resource Professionals to explain how antitrust law applies to employee hiring and compensation practices. The guidance advises that, going forward, the DOJ intends to conduct criminal investigations of companies that agree with one or more competitors to fix wages or other terms of employment, or that enter into “no-poaching” agreements by promising not to recruit the other company’s employees. The DOJ explains in the guidance that such agreements have the damaging effect of eliminating competition in “the same irredeemable way” as agreements to fix the price of goods or allocate customers, and further notes that agreements that do not rise to the level of a criminal violation may still result in civil liability under the statutes enforced by the FTC and DOJ. Companies that compete for employees may be deemed competitors even if the companies do not compete in the products or services that they offer.
The October 2016 antitrust guidance makes clear that illegal no-poaching or wage-fixing agreements need not be formal, written, or even spoken in order to be subject to potential antitrust enforcement. Rather, an agreement can be inferred from circumstantial evidence, such as evidence of discussions and parallel behavior. The guidance also addresses the legality of competitors exchanging sensitive information regarding the terms and conditions of employment, warning that the exchange of this type of information among competitors may amount to a violation of antitrust laws even without an explicit agreement. There are, however, certain permissible information exchanges recognized by the guidance, although careful consideration must be given by the companies involved with the exchange to make sure all legal requirements are met.
Finally, the October 2016 guidance offers suggestions for how businesses can permissibly exchange certain information, such as by exchanging aggregated, relatively old information through a neutral third party. The guidance also includes a Q&A section regarding answers to common scenarios faced by HR professionals. The FTC and DOJ also distributed a document titled Antitrust Red Flags for Employment Practices, which serves as a quick reference for HR professionals to detect warning signs of potentially illegal employment practices, such as participation in trade association meetings discussing the hiring, compensation, or competition for employees.
So much happened in 2016, and so much more is expected in 2017. It is imperative that your company continue to stay abreast of the ever-changing legal developments affecting your employees and workplace. In terms of restrictive covenants, and noncompete agreements specifically, not much is likely to diminish solely because of a Republican White House and Congress. Given that noncompete agreements mostly remain a creature of state and local law, it is likely that we will continue to see new and proposed initiatives to limit or ban noncompete agreements in various jurisdictions across the United States.
So ask yourself these three questions:
- Does your company truly want/need noncompete agreements given the nature of your industry and business model (and is your company actually soliciting employees from other companies without regard to their potential noncompete agreements)?
- If you do want/need noncompete agreements, for which positions and employees do you truly need a noncompete agreement, and why?
- If you do want/need noncompete agreements for certain positions and employees, are your agreements drafted in a way that most narrowly and reasonably protects your company’s valuable (and identifiable) business interests, without unduly harming or punishing the employee or general public?
When it comes to conversations with other companies that might be competing for workers from the same workforce, it is equally imperative that you ensure that your discussions and ultimate action, if any, do not run afoul of antitrust law. Looking back at 2016 and looking ahead to 2017, it is clear that big brother is and will be watching to some extent.