Reuters reports that the Obama administration has called on US states to put a ban on employee non-competes in many employment agreements that prohibit workers from taking jobs with the employers’ competitors.
According to the White House Press Office, non-compete agreements narrow employment options for an estimated one in five workers in the US. About 30 million US workers are affected by non-competes.
Camp Counselors and Sandwich Makers
Although more commonly used with senior executives and highly skilled workers like computer programmers, non-competes also affect one in six workers without college degrees, including summer interns, camp counselors, hair stylists, warehouse workers, and fast-food employees.
As the New York Times reported, some employees may not even realize that non-competes are part of their employment agreements.
According to the Times,
Backers of noncompetes [say] that they help spur the state’s economy and competitiveness by encouraging companies to invest heavily in their workers. Noncompetes are also needed, supporters say, to prevent workers from walking off with valuable code, customer lists, trade secrets or expensive training.
Misused?
The White House and the Treasury Department reported earlier this year that non-competes are over-used, and misused, in the employment context.
The latest White House statement says:
Most workers should not be covered by a non-compete agreement. Though each state faces different circumstances, we believe that employers have more targeted means to protect their interests, that non-compete agreements should be the exception rather than the rule, and that there is gross overuse of non-compete clauses today.
While the primary rationale of non-competes is to prevent workers from transferring trade secrets to rival companies, a considerable proportion come at the expense of workers, entrepreneurship, and the broader economy. Researchers have found that states that strictly enforce non-compete agreements have lower wage growth and lower mobility than states that do not enforce them
Non-competes in employment contracts are governed by state law. California, Oklahoma, and North Dakota make most employment-related non-competes voidable by employees as contrary to public policy.
In the past year, about a dozen other states have considered reforming their non-compete laws.
Keeping up with Silicon Valley
As the New York Times reported, non-competes are sometimes blamed for part of the failure of Boston’s Route 128 technology corridor to keep up with Silicon Valley:
Noncompete pacts were only one ingredient in the recipe that worked against Massachusetts and to the advantage of Silicon Valley, where employees can depart and start their own companies mostly without fear of a lawsuit.
Non-competes can also impact salaries. According to one economist, technical workers in Massachusetts would be paid seven percent more if the state had non-compete laws like those in California.
Best Practices
The White House has provided a set of “best practices” as well as a state-by-state report on current non-compete laws.
These best practices include:
- Banning non-compete clauses for certain categories of workers, such as:
- those under a certain wage threshold
- workers in occupations that promote public health and safety
- workers unlikely to possess trade secrets
- workers laid off or terminated without cause
- Improving transparency and fairness of non-competes by:
- disallowing non-competes unless they’re proposed before hiring or a significant promotion
- providing additional compensation to employees who sign non-competes
The White House says that by adopting these strategies “states can help ensure that workers can move freely from job to job, without fear of being sued.”
Guidance for General Counsel
In light of these trends, general counsel might want to review their employment-related agreements and consider:
- whether non-competes will be enforced in the states where their employees work, and
- whether less-restrictive terms can protect the company’s interests.
As we discussed in this recent blog, California courts will soon refuse to enforce forum selection and choice of law clauses in employment contracts that try to circumvent the state’s prohibition on non-competes.
As a leading A.I. contract review and analysis tool, we highly recommend aiding your review of employment agreements with technology to help streamline and speed up the process, increasing accuracy.
