What Are Non-Compete Agreements, and Should You Use Them?

When first staring a business, the legal aspects often come as an afterthought. Deciding job titles and salaries is at the forefront, while creating employee contracts feels like a detail. Even further, including a non-compete clause is the last thing on an employer’s mind—for good reason. The law around non-competes is complicated, nuanced and varied. Still the question stands, when should you include non-compete clauses and when should you avoid them for your business?

What is a non-compete?

A non-compete clause can be included in an employment contract. It is a restrictive promise that prohibits certain activities by the employee after the job has ended. In practical terms, non-competes ban former employees, for a certain length of time, from working for a competitor or using company trade secrets or customer lists.

A typical non-compete contains specific language around to time, distance and certain business practices. For example, a non-compete might say that a sales employee is prohibited from working a job in a related business or contacting former clients/coworkers if they work within 50 miles of the employer’s location, for the first six months.

The problem (or problems) with non-competes

As stated above, the law around these types of agreements is complicated and, recently, very much in flux. The phenomenon caught the eye of the White House in 2016, when it launched a campaign to collect information and evidence about U.S. employees and non-competes.

According to the White House, non-compete agreements “currently impact nearly a fifth of U.S. workers, including a large number of low-wage workers.”

The White House got involved because of the negative economic impact of these agreements. By its very nature, a non-compete limits worker mobility and constricts the labor pool. There is also concern that non-competes artificially stagnate wages and hinder the efficiency of the entire economy.

Roughly 30 million workers are covered by non-competes, according to the government’s brief. Further, the number of lawsuits filed to enforce these agreements has steadily risen from 2002 to 2013. This, too, has a negative economic impact.

The benefits of non-competes

Employers don’t (or shouldn’t) use non-compete agreements to punish or harm employees. The idea is to protect the investment of the original employer.

“Every business has trade secrets of some sort. Whether it is price, products, customers or market information, your company has had to learn some things the hard way,” Ohio attorney Matthew Crumpton said in an article titled “Five Legal Tips That Every Small Business Owner Should Know.”

Businesses should take a close look at what exactly needs to be protected by a non-compete. It makes sense to work with an experienced business attorney, as laws around employment contracts vary from state to state. The language should be as specific as possible, which means it should not be a standard template for employees at every level.

Having a thoughtful non-compete agreement for the vice president of sales at a software company might make good business sense. However, producing an identical agreement for a data-entry clerk probably does not. In fact, such overbroad, nonspecific agreements are exactly the type that had Obama’s White House concerned. (How the Trump administration will view the issue of non-competes remains to be seen).

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Real-world examples and trends

Court decisions regarding non-competes are all over the board, due in part to the fact-specific nature of lawsuits.

Perhaps the best-known recent case involves the sandwich chain Jimmy John’s. Jimmy John’s required employees to sign agreements that prohibited them from taking a job with a competitor for two years. Further, it prohibited them from taking a job within two miles of any Jimmy John’s location with any business that makes more than 10 percent of its revenue from sandwiches. CNBC reported in June 2016 that the fast-food restaurant had dropped the non-competes. This change came after the New York Attorney General found that the language was unlawful.

“Non-compete agreements for low-wage workers are unconscionable,” New York Attorney General Eric Schneiderman said in a statement. “They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued. Companies should stop using these agreements for minimum wage employees.”

New York’s AG office is actively pursuing companies that are using overly broad or unreasonable non-competes. The Jimmy John’s result came only a month after a negotiated agreement between the state and Law360, in which the company agreed to discontinue using their non-compete clauses (except for a few top executives).

In Golden Rd. Motor Inn, Inc. v. Islam, the Nevada Supreme Court held that a non-compete agreement that prohibited a worker from being “in any way affiliated with” a gaming business within 150 miles of the original casino was unreasonable and invalidated the entire employment agreement. While some states allow the offending clause to simply be erased or modified (so-called “blue penciled”), the Nevada court rejected that idea.

Some states, like California, have laws that prohibit the enforcement of non-competes altogether. According to the White House brief, however, this does not stop employers from including the clauses and employees from abiding by them, although enforcement is impossible.

This is not to say that all non-competes face an uphill legal battle. In October 2016, a court in Florida issued a temporary injunction prohibiting one insurance company’s former employees from working for another. In Brown & Brown Inc. v. AssuredPartners Inc. et al., the court in Daytona Beach determined that the injunction was necessary to prevent further harm while the case worked its way through the legal system.

Bottom line

Non-competes are valuable protections against the loss of trade secrets and competitive intelligence. Even so, employers should only use them where it’s necessary, reasonable and responsible. To do so, employers should stay up to date on employment laws and case law history in their state.

By Leigh Raper

Leigh Raper has a JD from Pepperdine University School of Law. She writes fiction and blogs about pop culture, as well as items from the world of and labor and employment law. Leigh also writes for the Avvo Stories blog. Avvo is a website with an answer when you’re thinking, “Is that even legal?” We can also help your business get a lawyer, a w-9, or a partnership agreement.

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