Steven Cesare, Ph.D.
A business owner from Alaska called me the other day to talk about the legal and practical roles that a Non-compete Agreement can fulfill in his company’s staffing, employee retention, and proprietary information plans. As we are all too aware, the last several years have seen a decided shift away from employer rights, towards employee license. Non-compete Agreements are acutely positioned within those cross-hairs.
In general, a Non-compete Agreement is a legal agreement or clause in a contract specifying that an employee must not enter into an employment relationship with a direct competitive employer, for a period of time (i.e., usually not longer than 24 months), within a prescribed geographical area (usually 25-30 miles from the employer’s main office) once the employment relationship with his/her current company ends. The primary intent of these agreements is to prohibit employees, contractors, and consultants from revealing proprietary information or secrets to any other parties during or after employment.
At a fundamental level, an employer must satisfy a common law test in order to enforce a Non-compete Agreement, such as by showing that the Agreement is necessary and narrowly tailored to protect an important business interest, usually in terms of both the geographic scope of the restriction and its duration.
Recent research by the U.S. General Accounting Office revealed that 18% of workers were subject to Non-compete Agreements, with one study estimating that 38% of workers had been subject to Non-compete Agreement at some time in their careers.
As I explained to the business owner, Alaska state law permits the use of Non-compete Agreements, while California, Colorado, Minnesota, North Dakota, Oklahoma, and Washington D.C. have imposed severe restrictions on their use. Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington prohibit Non-compete Agreements unless the employee earns above a certain salary threshold (i.e., usually restricted to exempt managerial employees, not blue-collar staff). Other states, like Iowa and Kentucky, limit the use of Non-compete Agreements for certain professions such as healthcare workers.
Aside from ongoing state restrictions, federal action is also underway. In specific, the Federal Trade Commission (FTC) seeks to outlaw all Non-compete Agreements nationwide by claiming they suppress wages, stifle innovation and make it harder for entrepreneurs to start new businesses. The final decision from the FTC is due in Quarter 2 of 2024.
The legal momentum against Non-compete Agreements is rooted in the belief that they violate the National Labor Relations Act (NLRA) by manifesting an unfair labor practice in the form of creating a “chilling” effect on employees from exercising their rights under Section 7 of the NLRA, which protects employees’ rights to take collective action to improve their working conditions.
Within that legal and practical context, I urged the business owner to proceed with his desire to implement a well-crafted Non-compete Agreement process underscored by the following best practices.
- Applicable only to supervisory, managerial, and executive employees, as well as consultants and contractors. Non-exempt employees must not be required to sign this document.
- Ensure the Non-compete Agreement is not written in an overly broad manner; carefully crafted with properly defined, balanced, and “reasonable” standards.
- Present the Non-compete Agreement as a stand-alone document requiring an employee signature, not embedding it within the annual Company Employee Handbook.
- Validate state and federal legal compliance by securing legal counsel approval prior to distribution.
- Work with external counsel to outline a detailed Standard Operating Procedure to be referenced in the event the former employee violates some aspect of the Agreement.
- Include a copy of the document previously signed by the employee as part of the employee’s standard exit package upon dismissal.
In closing, it is increasingly important for business owners to realize many aspects of human resources, once innocently thought of as being solely “administrative” have now become entirely “legal” through judicial activism and political change, representing severe risk if all necessary precautions are not taken.
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