Two weeks ago, the White House issued a proposal to increase labor market competition and at the heart of the proposal was a call to the states to begin to rein in the use of non-compete agreements, particularly for those whose jobs are low skilled and usually hourly. Non-competes are nothing new, particularly in the design industry and in other creative industries, as well as for technology workers and often sales based positions. While a non-compete is supposed to protect a business’ trade secrets and the business goodwill generated by the employee so that the employee can’t leave and carry those customers and goodwill with them at the expense of the employer.
The purpose of the non-compete all sounds good, but, the use of the non-compete has gotten a little out of hand. Here are some egregious problems that spurred the White House to study the problem and issue a call for change:
- Jimmy John’s was requiring its sandwich makers (not only store or franchise owners) sign non-competes. Sandwich makers are hourly and usually minimum wage workers.
- A summer camp in Massachussetts was requiring its teenage, part-time seasonal counselors sign non-competes that they would not work at another summer camp. (leaving aside the fact that people under the age of 18 are not legally competent to sign contracts without a parent).
- And the granddaddy of the all, Amazon requiring seasonal employees (doing warehouse fulfillment during the Christmas rush) being asked to sign non-compete that said they would not work for any entity that sold or provide any product or service that Amazon provides. The non-compete extended across the entire globe. Given the breadth and depth of Amazon’s offerings, is there any job that would not be in violation of the non-compete?
Based on the White House proposal and the abusive practices that are coming to light, it is probable that several states, particularly those who tend to be a bit more labor friendly (read Maryland and Washington, DC) may begin to pass legislation aiming to limit the use of non-competes or rendering them largely unenforceable. Today, California, North Dakota and Oklahoma have laws on the books that render noncompete agreements generally unenforceable. Illinois prohibits the use of noncompetes for low wage workers. Washington, DC, Maryland, Virginia and West Virginia are among the 22 states that do not have explicit statutory references to non-compete agreements. I suspect, at least in Maryland, that legislation limiting non-compete agreements is likely to be introduced in the General Assembly in January.
Traditionally, non-competes have limited a former employee in two ways, time and geography. For example, a non-compete might limit employment for two years in a forty-mile radius from the company. But I have seen non-competes with a greater and lesser amount of time and a greater and lesser geographic area covered. The purpose was to protect the company’s business interests. But increasingly, there are being questions raised by what business interest is at stake with a low skill, non-exempt employee who does not possess trade secrets or customer information.
Adding to the problems faced in this area, many non-compete agreements are often poorly drafted and poorly understood both by the company and the employee. Many contain not only a non-compete, but also a non-solicitation clause of significant length and a non-disclosure clause that is so overbroad as to act like a non-compete that is five or ten years in length because of the “potential” that a former employee might use “confidential” information and “harm” the company. The result is that even savvy employees who might legitimately be subjected to a non-compete probably don’t understand the restrictions well enough.
So what does all this mean? Well, now is a good time to look at your firm’s use of non-compete agreements, particularly those for your non-exempt staff and those workers who do not have significant client interaction on a regular basis. These kinds of workers are exactly those type of workers who have, at least in the eyes of the White House, been abused or at least don’t have enough of a bargaining position and knowledge to understand the implications of a two year non-compete agreement. A noncompete is about managing risk to the company after the employee leaves. Simply put, a company needs to look at each employee or class of employees and determine what the risk is to the company and draft a non-compete, if necessary, that matches that risk. It is possible and likely necessary to have multiple non-compete contracts for different employees.
All this is not to say that noncompetes don’t have their place in a creative business, in fact the more direct contact an employee has with clients, the higher the risk of competition. But a state of the art noncompete agreement will ensure that not only will the contract pass muster with a court if it must be enforced, but also likely to be compliant with any statutory changes that may come, if the legislation does anything short of an outright unenforceability of the agreement.
MATT JOHNSTON IS A SOLO ATTORNEY WITH A FOCUS ON SMALL BUSINESS REPRESENTATION, COPYRIGHT AND TRADEMARK LAW, AND DISPUTE RESOLUTION. MANY OF MATT’S CLIENTS ARE DESIGNERS AND CREATIVE PROFESSIONALS WHOSE CONCERNS OVERLAPPING MATT’S PRACTICE AREAS. MATT CONCENTRATES ON DRAFTING CLEAR CONTRACTS OF ALL TYPES AND HELPING DESIGNERS WITH THE LEGAL SIDE OF THE DESIGN BUSINESS. AS A BENEFIT TO AIGA MEMBERS, MATT OFFERS A 10% DISCOUNT ON ALL CONSULTATION APPOINTMENTS, FLAT FEE PROJECTS, AND HOURLY FEES.
THE CONTENT OF THIS COLUMN IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE APPLICABLE IN ANY SPECIFIC SITUATION. NO ATTORNEY-CLIENT RELATIONSHIP IS CREATED THROUGH THIS COLUMN. IF YOU NEED CONFIDENTIAL LEGAL ADVICE, MATT IS AVAILABLE FOR PRIVATE AND PRIVILEGED CONSULTATIONS. CONTACT MATT IF YOU HAVE SPECIFIC CONCERNS.