Are Noncompete Agreements Right for You?

Are Noncompete Agreements Right for You?

Employers’ reliance on these arrangements is growing, but so is resistance among employees and state governments.

By Rita Zeidner November 28, 2017

​It took a lawsuit and millions of dollars in legal fees to change Josh James’ mind about noncompete agreements.

The founder and CEO of Domo, an American Fork, Utah-based cloud computing company, was sued in 2010 by his former employer, Adobe Systems Inc., for violating a noncompete when he started his own business. The two parties settled the case two years later for an undisclosed sum. After that, James tore up the agreements he’d previously required his own workers to sign. Today he’s urging other companies to do the same. 

James says noncompete agreements—the legally binding documents that many businesses require employees to sign to prevent them from leaving to work with an organization’s competitors, usually for a specified period and in a limited geographic area—are undercutting Domo’s ability to attract qualified workers. Additionally, some would-be investors are so skittish about the labor supply in Utah that they’ve pressured him to move his company to California, one of the few states where the agreements aren’t allowed.

​James is far from alone in speaking out against the arrangements. They have long been reviled by employee advocates for putting pressure on workers to stay in jobs they no longer want. And it’s not even clear that the arrangements are particularly effective. 

“If a person wants to leave a job, can you really stop them from taking another one?” asks Cathy Donahoe, vice president for HR at Domo.

About 1 in 5 U.S. workers—28 million people—currently function under noncompete agreements, according to a 2017 study by researchers at the University of Maryland and the University of Michigan. And nearly 40 percent have been required to sign one at some point in their careers.

The growth of the knowledge economy and the penchant today’s workers have for job-hopping workers are likely driving many employers to rely on such restrictions to provide an added layer of protection, says Russell Beck, a partner at the Boston law firm Beck Reed Riden. “Intellectual property is easy to take, compared to bricks and mortar,” he says.

No one disputes a company’s right to protect its proprietary information. But when considering whether to use these restrictive covenants, you’ll need to carefully balance the company’s business interests against your workers’ right to move freely from job to job—while keeping in mind the many state laws regulating the use of noncompetes.

Questioning the Practice

​Leaders at Cradlepoint, a 10-year-old company that makes computer networking equipment in Boise, Idaho, were caught by surprise last year when the state Legislature passed reforms that make it easier for employers in Idaho to enforce noncompetes. The changes were supported by established businesses but could hurt young companies such as Cradlepoint that are struggling to find and hire qualified workers in a limited labor pool, says Jodi Richter, the company’s HR director. 

Some HR professionals are even using their opposition to the agreements as a recruiting tool. For example, Veeva Systems, a software manufacturer based in Pleasanton, Calif., included language in its handbook stating that noncompetes “restrict employees’ ability to pursue new opportunities and advance their careers.” Veeva promises job candidates covered by such contracts elsewhere that the company will defend their right to work for Veeva, even if a former employer threatens court action.

After spending millions of dollars fending off its competitors’ lawsuits, Veeva is now striking back. Last summer, company representatives filed a lawsuit in California seeking to prevent three companies that have enforced noncompetes against ex-employees hired by Veeva—Medidata Solutions, Quintiles IMS and Sparta Systems—from imposing them. Veeva argues that the agreements violate the state’s fair competition statutes because they are overly broad. According to the company’s general counsel Josh Faddis, the case “could set a national precedent for preventing companies outside of California from enforcing noncompetes against former employees who go to work for California-based companies, whether or not they reside in California.”

​Representatives from Medidata responded in a statement that they believe the real issue is Veeva’s alleged misappropriation of its intellectual property, not worker mobility, contending that Medidata “has a responsibility to its customers, employees and investors to protect its substantial investments.” (Sparta and Quintiles declined to comment for this article.)

In Massachusetts, the Greater Boston Chamber of Commerce, after long and sometimes polarizing discussions among its members, now supports legislation banning the arrangements for low-wage and low-skilled workers, a one-year limit on their duration, and other reforms that would require companies to be more transparent about their restrictions. “There were some egregious applications of noncompetes in our area,” says James E. Rooney, head of the pro-business group. The organization, however, still supports management’s right to use the agreements for upper-level employees who are privy to trade secrets.

Protecting the Company

​Business owners have always worried about rogue employees stealing their stuff, including critical proprietary information. That’s why, despite dissent from some corners, plenty of organizations defend the use of noncompetes as a lawful practice that benefits companies and workers alike.

“[As an employee], I want to know that my company’s intellectual property and customer relations, and a litany of company value, is protected so I have a job,” says Randy Shumway, founder of the Cicero Group, a management consultancy in Salt Lake City.

Cicero Group requires some of its workers to sign the covenants, but Shumway has never felt the need to enforce one. “We try to be an honorable company,” he explains. “Employees come, and when they leave, I want to wish them the best.” The company would seek to enforce a noncompete only in response to an egregious violation of the agreement, he says. 

[SHRM members-only resource: Sample noncompete provision.]

States Push Back

​Despite the growing popularity of noncompetes among businesses, many states are drawing the line on how far they can go. 

California, North Dakota and Oklahoma ban noncompetes unless they are part of the sale of a business. And more than two dozen states have attempted to weaken the agreements’ impact by limiting the duration of the restrictions and prohibiting their use in some professions, particularly broadcasting and medicine.

Increasingly, companies are also in the hot seat for requiring low-skilled, low-wage workers such as camp counselors and sandwich makers to sign restrictive covenants. “I see employers going deeper into the ranks and broader with their agreements,” Beck says.

​More than one-third of workers without a bachelor’s degree report signing a noncompete at some point in their careers, and 13.5 percent of those earning less than $40,000 have agreed to them, according to the Michigan-Maryland study. These workers rarely have access to the kind of proprietary data the agreements were designed to protect.

“There is the inaccurate perception that noncompetes are about protecting the keys to the castle and protecting trade secrets,” says Massachusetts state Rep. Lori Ehrlich. The reality is that the agreements ensnare a broad swath of workers.

In 2016, Jimmy John’s restaurants settled lawsuits filed by New York and Illinois by agreeing to stop requiring sandwich makers and delivery drivers to sign restrictive contracts. In Illinois, the company will also pay the state $100,000 to create programs that promote best practices regarding the arrangements.

New York also settled a suit in 2016 against Law360, a legal news site that required most of its employees to sign noncompete agreements. Eric Schneiderman, the state’s attorney general, was particularly incensed that the mandate applied to entry-level news assistants working their first jobs out of college.

“Unless an individual has highly unique skills or access to trade secrets, noncompete clauses have no place in a worker’s employment contract,” Schneiderman said in a statement.

Following the Jimmy John’s settlement, Illinois passed a law prohibiting noncompetes for minimum-wage workers. Other states are considering similar reforms.

Ehrlich says she’s seen employer sentiment on the issue become more nuanced over the eight years she has been working to make the covenants less restrictive. Some companies that once resisted any legislative efforts to rein them in have softened their position after many talented employees whose options were limited by them left the state, she says. “The workforce is so tied down that [businesses] can’t hire the people that they need.” 

​State Noncompete Laws by the Numbers

Many states, concerned that noncompete agreements could be harmful to workers and the economy, restrict what employers can require.

25 states and Washington, D.C., prohibit noncompetes for those in certain professions, the most frequent of which are broadcasters and medical practitioners. 

Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Missouri, New Hampshire, New Jersey, New Mexico, North Carolina, Rhode Island, Tennessee, Texas, Vermont and Washington.

26 states have laws governing the enforcement of the arrangements: 

Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, South Dakota, Texas, Utah, Vermont and Wisconsin.

21 states and the District of Columbia have no specific statutory reference to noncompetes: 

Alaska, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Washington, West Virginia and Wyoming.

3 states prohibit the agreements, regardless of whether they were signed within the state or elsewhere: 

California, North Dakota and Oklahoma.

Source: Employee Noncompetes: A State by State Survey, Beck Reed Riden LLP, 2017, and Non-Compete Reform: A Policymaker’s Guide to State Policies, White House, 2016.

Getting Your Agreement Right

​In light of the increased scrutiny of noncompetes, coordinate closely with legal counsel if you plan to use such contracts. The most effective agreements strike a balance between protecting an organization’s business interests and allowing a person the right to earn a living. Those with sweeping restrictions don’t just risk alienating employees and hampering recruitment—they also may not pass legal muster.

“If you paint with too broad a brushstroke, it could backfire,” says Declan Leonard, a managing partner at the law firm Berenzweig Leonard in Alexandria, Va. “Judges don’t love broad restrictive covenants.” 

It’s also important to have “eyes wide open, because this is absolutely something for which you’re going to receive pushback from employees,” says Adam Calli, SHRM-SCP, an HR consultant with Arc Human Capital in Woodbridge, Va.

​“Noncompetes are all about risk management,” Calli says. “But when you decide you want to have an agreement, you’re also introducing a new risk. You have to really give some hard thought to the cultural impact and the strategic value.”

Placing limitations on someone’s job prospects is not something any employer should take lightly, so make sure you know exactly why you’re considering doing so. “The very first thing I say to clients is, ‘Tell me why you want one. What are you trying to prevent or protect?’ ” says Christine V. Walters, SHRM-SCP, an attorney who heads FiveL Co., an HR consulting practice in Westminster, Md.

After learning more, Walters often finds that employers aren’t particularly interested in where former employees go to work. Rather, they just want to make sure departing workers don’t take client lists or other trade secrets with them. “In those instances, I respond that what you want is a nondisclosure agreement,” she says. “Other times they’ll tell me they don’t want someone to steal people or clients. Then what you want is a nonsolicitation agreement.”

Also think long and hard about how to react to violations. Employers that pick and choose the people for whom they enforce the agreements may send the message that they are not serious about the restrictions, according to Harold Datz, an employment law professor at Georgetown University and The George Washington University law schools in Washington, D.C. And they open themselves up to discrimination claims if, even inadvertently, their enforcement affects one protected group over another.

“There’s a lot more to noncompetes than simply handing a new employee a piece of paper to sign,” Datz says. 

Tips for a Better Noncompete

Here are some ways to ensure that the restrictions you impose can be enforced and fit your objectives:

  • Identify what you are trying to protect and who has access to the secrets. Tailor your agreement to protect those assets and apply the restrictions only to those who are truly privy to trade secrets. Stay away from one-size-fits-all templates or other standardized approaches.
  • Set time limits. Many trade secrets have short shelf lives. Don’t make restrictions longer than they need to be. Two years or less is the norm.
  • Set geographic boundaries. If competition is in one specific region, there’s no need for a nationwide restriction.
  • Be transparent. Inform job candidates of your company’s requirements at the start of the interview process and explain how and why the restrictions apply.
  • Provide consideration. Many states require employers to give “adequate consideration” when requiring existing employees to enter into noncompetes. This means giving them something of value in exchange for signing. Although some states say continued employment is consideration enough, others require something more, such as a raise or bonus.
  • Consider unintended consequences. Evaluate the impact of the restrictions on your organization’s ability to recruit quality workers. Do they scare away potential hires? If so, they may not be in your best interest.
  • Stay current. State law surrounding noncompetes is evolving. Work closely with a lawyer to ensure that your contracts are in compliance with the current law in each state where you do business and update them as necessary.
  • Consider alternatives. Would a different kind of contract, such as a nonsolicitation or nondisclosure agreement, better accomplish your desired goal? If your objective is to rise above your competition, find other ways to keep employees happy so they won’t jump ship—by providing higher pay, superior benefits or better work/life balance, for example. Some U.S. companies are opting for so-called garden leave provisions, in which workers promise to give a certain amount of notice to the employer before resigning. In exchange, the company doesn’t require the employee to work during that period but continues to provide pay and benefits.

Post-Employment Restrictions In a Nutshell

Many companies rely on post-employment agreements to keep employees and former workers from stealing and sharing trade secrets. Work with an attorney if you are considering this option, and realize that this area of employment law is evolving rapidly; there are no guarantees that a contract that’s legal when signed will still be valid when you decide to enforce it.

  • Customer nonsolicitation agreements prohibit an individual from poaching a former employer’s customers or clients for his or her benefit or for the benefit of a competitor.
  • Employee nonsolicitation contracts prevent an individual from attempting to hire or retain a former employer’s workers.
  • Nondisclosure agreements lay out terms that prevent former employees from disclosing confidential proprietary secrets.
  • Noncompete agreements prevent former employees from going to work for, advising or otherwise engaging with an organization’s competitors, usually for a specified period and in a limited geographic area.

Rita Zeidner is a freelance writer in Falls Church, Va.

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