Employers wishing to enter into noncompete agreements with their employees frequently attempt to issue those agreements after the employment relationship begins. Often, the desire to have such an agreement arises from a change in the employee’s status with the organization—after all, the employee that has worked his or her way up through the ranks may not have been privy to information that would make a noncompete important at the time they were hired. As employees become entrusted with more and more responsibility, however, careful employers may wish to prevent the employee from using that information for the benefit of a competitor. Although Michigan law permits issuance of a noncompete agreement to current employees for exactly that reason, pending legislation may end that practice.
The culprit is a bill that was introduced in the Michigan legislature in November, 2011, (S.B. 786) which, if signed into law, would invalidate any noncompete agreement entered into after an employment relationship begins. That prohibition would be in effect regardless of any change in the employee’s position or the provision of additional consideration by the employer in return for the promise not to compete for a reasonable period of time after the employment relationship ends.
The pending legislation would have a significant effect upon Michigan employers that rely upon noncompete agreements to protect their legitimate competitive business interests. Currently, if an employee has worked his or her way up “through the ranks,” an employer can require a noncompete from that current employee in return for a promotion that would, for the first time, make sensitive commercial information available to that employee. Even where the employee’s position has remained the same, an employer that has a newfound concern about unfair competition can require entry into a noncompete agreement as a term of continued employment.
The bill would eliminate that flexibility for Michigan employers. If signed into law, a noncompete would be valid only if the employee were informed of the requirement to enter into a noncompete agreement either “at or before” the time of the initial offer of employment. Employers that promote a current employee into a position that makes sensitive commercial information available to them for the first time would no longer be able to insist upon a noncompete as a condition for that promotion. Employers wishing to expand into a new line of business that is particularly sensitive to unfair competition would not be able to require current employees to enter into noncompete agreements, even while new employees could be prevented from competing following the termination of their employment.
So what can employers do? First and foremost, Michigan employers wishing to maintain the flexibility to enter into noncompete agreements with current employees should contact their state legislators and encourage them to work against the passage of this bill. Beyond that, however, employers should assess their businesses now, to determine whether there are employees who should be governed by noncompete agreements but who are not. The bill, if passed, will not have retroactive effect and will not invalidate any noncompete agreements that exist at the time of its passage. Employers also should consider implementing policies and agreements protecting confidential and sensitive information short of noncompete agreements. Confidentiality agreements, agreements prohibiting the solicitation of co-employees, and agreements prohibiting the solicitation of customers all are unaffected by the proposed legislation and, if drafted correctly, can be nearly as effective as noncompete agreements at preventing unfair competition.
We will continue to monitor this legislation and will issue an alert should it eventually be signed into law. In the meantime, Michigan employers are well advised to put measures in place protecting confidential business information now, before this legislation becomes effective.