Noncompete Agreements Hurt Recruitment

By Allen Smith, J.D. Aug 17, 2016
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​The White House is among the opponents of noncompete agreements for low-wage workers.

Experts dispute whether companies are using noncompete agreements more than ever, but they agree on one thing: Many talented job applicants refuse to sign them and choose employers that don't require them.

"Today's workforce is less loyal than in the past, and movement between employers is a fact of life in modern business," said Andrew Sherrod, an attorney with Hirschler Fleischer in Richmond, Va. "Many talented employees do not want to be tied down and, if given the choice to work for a company that imposes noncompete restrictions versus one that does not, might choose the latter."

A White House paper on noncompetes published in May noted that many workers were asked to sign noncompetes only after accepting a job offer, but comments about noncompetes on Glassdoor can alert applicants to this practice.

White House Paper

Noncompetes may be unpopular among employees, but they're becoming more common, according to Michael Elkon, an attorney with Fisher Phillips in Atlanta. 

As a practical matter, most courts won't enforce them against lower-level employees, he noted, but their more widespread use is attracting political attention.

The White House paper criticized the growing use of noncompetes, saying that they impact nearly one-fifth of U.S. workers. It cited a 2013 study commissioned by The Wall Street Journal that found a 61 percent rise from 2002 to 2013 in the number of employees getting sued by former companies for breach of noncompete agreements.

Approximately 14 percent of workers earning less than $40,000 are subject to noncompete clauses, including fast-food employees, warehouse workers and camp counselors, the White House said. 

Noncompetes are even prevalent in California, where courts do not enforce them; 19 percent of workers in California report signing a noncompete. Many workers are not aware of the lack of enforcement in California when they sign the agreements, the report noted.

Several states ban noncompete agreements for certain sectors, occupations and time periods. Hawaii banned noncompetes for technology jobs, and New Mexico banned them for health care jobs. Oregon banned noncompete agreements that last longer than 18 months, while Utah has limited them to a year. 

Delaware, Illinois, Massachusetts, Tennessee and Texas do not enforce noncompetes against physicians, the White House report noted.

However, some state courts strike offensive clauses from noncompetes if doing so renders the remaining language enforceable under the state's law. Meanwhile, other courts, most recently the Nevada Supreme Court, reject this so-called blue penciling of noncompetes. 

Paul Munger, an attorney with Taylor English Duma in Atlanta, said, "We're definitely seeing more noncompetes. Many states have changed their laws to make it easier to enforce noncompete agreements, and at the same time, companies are very concerned that the theft of their electronic information—customer lists and other data—makes it easier for a former employee to compete against them."

Employers should think about their most important relationships and plans, and tailor their noncompete agreements to protect both, Elkon said. He noted that if rivals use noncompete agreements and an employer doesn't, the latter is at a competitive disadvantage.

Other Restrictive Covenants

Not everyone is seeing an uptick in noncompete agreements. Sherrod said noncompetes are used less frequently than in the past for routine hires and sales personnel. Instead, he said, confidentiality and nonsolicitation agreements are becoming more widespread, "as the value of many businesses in today's economy is derived from their intellectual property and customer base."

"I believe that the decline is due not only to the difficulty of upholding traditional noncompetes in certain states, but also to the realization by many companies that they can protect their customers and proprietary business information sufficiently through confidentiality and nonsolicitation agreements that are typically easier to enforce," he said. 

In addition, he said, many employees can more easily understand and accept confidentiality and customer nonsolicitation restrictions. 

Restrictive covenants might make sense for high-level executives, who typically are paid generous severance on separation from employment, but they usually don't make sense for low-level employees, he noted. "Employees who are lower down the company food chain might not have sufficient knowledge of company secrets or customer relationships to justify imposing a noncompete, especially if the restriction impedes the employee's ability to make a living otherwise," Sherrod said. Federal legislation has been proposed to limit the use of noncompete agreements in low-wage fields, the White House paper stated.

"Maintaining the ability to attract top talent is [a] factor companies should consider in evaluating whether to impose a noncompete or other forms of post-employment restrictions," he said.

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