The Attorney General for the State of New York (“NY AG”) recently announced a settlement with WeWork Companies, Inc. that will revamp WeWork’s use of employee non-compete agreements. The announcement comes amid wide-ranging legal challenges to various labor practices employed by the shared-office space company, one of New York’s largest private office tenants.
Why were WeWork’s non-compete agreements unenforceable?
Non-compete agreements are meant to protect legitimate interests of employers. In general, New York law allows for enforcement of non-compete agreements in employment contracts. For example, common scenarios in which non-compete agreements are likely to be deemed enforceable are to protect an employer’s trade secrets and to prevent employees that developed specialized skills while working for an employer from taking those skills to a competitor. However, there are exceptions that are intended to limit the restrictive nature of such agreements.
The NY AG began an investigation into WeWork’s employment practices after receiving a tip that WeWork required all employees to sign employment agreements that contained non-compete provisions. WeWork’s practice was determined to be indiscriminate, impermissibly requiring every employee, from the most senior executive to the janitorial staff, to agree to the non-compete restriction as a condition of employment. Because WeWork’s non-compete agreements were more restrictive than required to protect its legitimate business interests, the NY AG was able to procure a non-financial settlement agreement from WeWork in which the company will entirely revamp its use of non-compete provisions. Such changes include:
- Shortening the non-compete period from 1 year to 6 months;
- Narrowing the geographic restriction to a 15-mile radius from those WeWork locations engaged in the business line in which the employee worked, in contrast to the former restrictive location of any geographic area in which WeWork operated; and
- Narrowing the scope of competition and limiting the restriction to specific lines of business in which the employee worked while with WeWork.
In addition to the nearly 1,800 WeWork employees whose employment agreements will be revised, the settlement with the NY AG will also require that WeWork release some 1,400 employees from the terms of their existing non-compete agreements entirely.
How to Properly Employ Non-Compete Agreements
When narrowly-tailored or reserved strictly for key personnel or others that have access to valuable trade secrets or confidential company information, companies can effectively use non-compete agreements to protect their interests. However, as the WeWork settlement demonstrates, widespread use of over-broad agreements carries with it the very real risk of drawing the scrutiny of regulatory authorities. As a result, it is imperative that employers seek the advice of knowledgeable counsel to ensure that non-compete agreements currently in use, or those that are being contemplated, are properly drafted and enforceable.