Rather than inducing them to stay for the long term with good pay and other incentives, many employers routinely require new hires and their other employees to sign non-compete agreements restricting the employees’ professional options if they leave (voluntarily or involuntarily). Non-competes also prevent other companies from hiring the best talent. By signing a non-compete agreement, employees agree they will not go to work at a rival company, or start one of their own, after they leave their employer.
MacDonald Hoague & Bayless can help. For over 65 years, we have been fighting for employee and individual rights, and our litigation attorneys are experienced in employment and intellectual property law.
The following is general information about non-compete provisions. It is not legal advice or guidance on how these laws may apply to you. Legal advice can be provided only after a qualified lawyer has carefully reviewed the facts of your situation.
The use of non-competes has increased in recent years, proliferating in all sorts of fields. They are being used not only in technology and sales, but have been imposed on employees from event planners to chefs to hairdressers to investment fund managers to yoga instructors. As noted in a PBS NewsHour program last year, a Massachusetts man whose job largely involved spraying pesticides on lawns had to sign a two-year noncompete agreement; a textbook editor was required to sign a six-month pact; and Jimmy John’s used non-competes to restrict its sandwich makers from moving to other sandwich-making companies.
Companies are using non-competes not only with new hires, but as a condition for a promotion or to receive a severance. It has been reported that nearly 40 percent of Americans have signed a non-compete agreement during the life of their career, and nearly 20% of American workers (or 20 million people) are currently bound by one.
The sometimes devastating consequences become apparent to the employee who signs such an agreement only later – when the worker is fired, laid off, or wants to leave to pursue another opportunity or to escape an abusive boss or unreasonable work conditions (e.g., sexual harassment, denial of equal pay or disability accommodations).
A recent federal report notes that employees often do not understand the often unfair implications when they sign such agreements. Research also suggests that the “best and brightest” in certain fields, including inventors and innovators, do not want to work for companies with non-competes, and choose companies that do not require them (or locales where they are unenforceable). See more here.
Such studies indicate that non-competes have a negative impact on innovation and economic development, preventing the flow of talent and thwarting entrepreneurship and the starting of new businesses. All of this has led some politicians nationally and in various states to try to curtail employers’ unreasonable use of such agreements. California, for example, bars non-competes, and some believe that the success of Silicon Valley is tied to the lack of non-competes and the resulting free flow of talent and entrepreneurship.
For now though, non-competes exist in most states and they can cause a good deal of potential harm for employees who confront them or have signed them, and for the companies they may wish to start or join later. Applicants and employees should have an attorney review such a contract before they sign it. Both employees and their new employers (or would-be new employers) should have an attorney advise them whether a non-compete with the old-employer is enforceable.
How Non-Competes Work
Non-competition agreements, or “non-competes,” generally restrict the ability of a former employee to take a job with a competitor within a specified geographic area. The recent Treasury Department report explains that about 18 percent of employees report working under a non-compete agreement and about 37 percent report having worked under one at some point during their career.
Too often, non-competes are illegitimate or overly broad. Employers can effectively protect confidential information and their client relationships through other methods, such as non-disclosure agreements and non-solicitation agreements. California bans non-competes without adverse effect on business. Indeed, when challenged, courts often disapprove of them as an unfair abridgment of employee rights.
To be valid, an agreement must: (1) protect a legitimate business interest of the employer, and (2) be reasonable in scope, geography, and length. Also, the employer must have given the employee something of value in exchange for signing the agreement. (New employment is usually enough, but continued employment usually is not.)
But even if a non-compete is unreasonable, many employees cannot afford to challenge its terms in court – the attorney’s fees and costs can run into tens of thousands of dollars or much more. As one court noted: “For every covenant that finds its way to court, there are thousands which exercise and in terrorem effect on employees who respect their contractual obligations and on competitors who fear legal complications if they employ a covenantor …” Reddy. v. Community Health Fdn. of Man., 298 S.E.2d 906, 916 (W. Va. 1982). Even successful legal challenges to such agreements often subject workers to a costly, lengthy, and exhausting litigation. And if the court does find the terms to be unreasonable, rather than voiding the contract, the court generally will modify the contract’s terms to make them reasonable and then enforce the new terms.
Politics
Last year, the White House backed proposed federal legislation to curb enforcement of non-compete agreements, and urged states to adopt similar legislation. “Non-compete agreements narrow the employment options for an estimated one in five workers in the United States,” the Administration said. “[T]here is substantial evidence of overuse and misuse of these clauses.”
Congress did not approve the federal legislation, but the state of Washington and other states are considering various proposals. For example, as originally introduced in Washington State, House Bill 1967, would:
- Bar employers from enforcing non-competes against independent contractors, temporary or seasonal workers, and employees who are laid off or terminated without just cause;
- Make it more difficult for employers to enforce non-competes for more than one year or against employees who are not executives; and
- Allow employees who successfully challenge unreasonable non-competes in court to collect financial damages under certain circumstances, and to recover their attorney fees and costs incurred in bringing the challenge.
That version of HB 1967 will not become law this year.
How to Protect Yourself and/or Your Company
Prospective employees and employees faced with signing non-compete agreements can best protect their interests by having an attorney review them before they sign the document. Under the best of circumstances, challenging a non-compete after-the-fact can be a difficult, costly process – and can unduly interfere with changing jobs or starting your own company. Getting legal advice in advance of signing an agreement, or in advance of leaving a job subject to an agreement, is in an employee’s best interests. It is less expensive and less arduous and helps an employee make thoughtful plans about their future.
Companies wishing to hire an employee who has signed a non-compete with a competitor should also have an attorney advise them whether a non-compete with the old-employer is enforceable. It helps the new/competing employer make thoughtful and cost-effective plans about its talent pool and business development.
MacDonald Hoague & Bayless is here to help. For over 65 years, we have been fighting for employee and individual rights, and our litigation attorneys have a wide range of experience representing those faced with non-competes, in conflict with their employers as well as those seeking advice and counsel on how to avoid or resolve such issues, and in intellectual property law.