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Noncompetition agreements have been met with increased scrutiny at the federal and state levels, but that doesn't mean employers should abandon restrictive covenants altogether.
Businesses generally use noncompetes to protect their trade secrets, client relationships and competitive advantage. But recent high-profile cases have focused on their use with rank-and-file employees, such as delivery drivers and restaurant workers.
The attention on noncompetes revolves around balancing the competing interests of employers and employees, said John Glancy, an attorney with Ogletree Deakins in Greenville, S.C.
It all started with a report by the U.S. Department of the Treasury in March followed by a White House report in May and then various press releases from the Illinois and New York attorneys general, said Clifford Atlas, an attorney with Jackson Lewis in New York City.
"This stems from a perception, and perhaps a misperception, that employers are using overly broad noncompetes and enforcing them against lower-level employees," he said.
In June and August, the New York Attorney General's Office announced settlements with several large employers that agreed to stop requiring the vast majority of their workforce to sign noncompetition agreements.
In Illinois, a law restricting the use of noncompetes was passed shortly after the state attorney general criticized employers that prevent low-wage earners from seeking employment with competitors.
The attorneys general are sending a message that overreaching noncompetes aren't going to be tolerated, Atlas said.
He noted that courts have traditionally refused to enforce overly broad agreements anyway. "A noncompete that follows the rule of reasonableness will generally be enforced in appropriate circumstances," he said.
Illinois Low-Wage Earners
There is an increasing concern that noncompetes are being used in an improper fashion to limit the mobility of low-wage workers, explained James Witz, an attorney with Littler in Chicago.
Illinois Attorney General Lisa Madigan has said that preventing employees from seeking employment with a competitor is unfair.
"By locking low-wage workers into their jobs and prohibiting them from seeking better-paying jobs elsewhere, the companies have no reason to increase their wages or benefits," Madigan said in a June 8 statement.
On Aug. 19, Illinois Gov. Bruce Rauner signed the Freedom to Work Act, which will prevent private-sector employers in the state from entering into noncompete agreements with "low-wage workers" starting on Jan. 1, 2017.
The act defines a "low-wage employee" as someone who earns up to $13 per hour or the applicable federal, state or local minimum wage—whichever is greater.
Under the act, employers may not prohibit low-wage employees from performing:
Witz said that certain language didn't make it into the act that would have required employers to inform potential employees about any noncompete agreement at the start of the hiring process.
It is still a best practice, however, to ensure that potential new employees are informed about any restrictive covenants in the original offer letter or proposal, he noted. This will prevent employees from later arguing that they weren't aware of the requirement when they accepted the job.
New York Settlements
The New York Attorney General's Office garnered attention when it announced settlements this summer with three large companies that agreed to stop using noncompetes except in limited circumstances. The companies had previously required entry-level and rank-and-file employees to sign such agreements.
Attorney General Eric Schneiderman has publicized what appears to be a private war against noncompetes generally, said Gary Glaser, attorney with Littler in Long Island, N.Y.
It is well-established under New York law that noncompetes are generally enforceable if they serve a legitimate business purpose and are narrowly tailored to protect the employer's trade secrets or goodwill, he said. They may also be used if an employee has unique or specialized skills.
But the attorney general made statements that may lead the general public to believe that noncompetes aren't enforceable in New York, Glaser observed.
He pointed to a press release from the attorney general's office that said, "Workers should be able to change jobs without fear of being sued."
It could be discerned later that the attorney general was primarily focusing on entry-level and lower-ranked employees, but he seems to be painting noncompetes with an overbroad brush without linking his statements to any legal theory, Glaser said.
The facts and circumstances with regard to a particular employee could support enforcement of a noncompete, he explained. That's why courts make case-by-case determinations after analyzing the individual case under well-developed legal principles.
An Important Tool
"Despite the recent assault on noncompetes, they remain an important tool for employers, as long as they're used appropriately," Atlas said.
"Employers should keep in mind that one size definitely doesn't fit all," he added.
Glancy said that every good business person wants to prevent competition, but employers have to ask themselves what legitimate business interest the noncompete protects and then carefully craft an appropriate agreement.
While traditional noncompetes may be appropriate for high-level employees, employers may want to use less restrictive agreements for other workers, Witz said.
As an example, he said, an agreement with sales employees not to solicit the customers that they worked with may meet the employer's legitimate business needs, rather than a full noncompete clause restricting their ability to work in a particular geography or field.
An agreement not to disclose confidential information would be applicable to most employees, he added.
Multistate employers should note that laws vary from state to state, Glaser said. As a general rule, courts frown upon employers that require all employees to sign an agreement regardless of their access to trade secrets.
Employers should determine whether they have an appropriate basis for the noncompete, and if not, they should consider a less restrictive agreement, he added.
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