How to Effectively Utilize Noncompete Agreements in a Tight Labor Market
Noncompete Agreement

As most employers know, “human capital” is currently a very precious commodity and employers are using legal tactics to retain their star performers. One tool employers often use to try to retain high-value employees is a restrictive covenant, such as a non-compete agreement. Non-compete agreements seek to prevent an employee from going to work for a competitor. With so much movement in the job market lately, efforts to enforce non-competes have skyrocketed. So it is important to make sure that your documents are enforceable and that you comply with current laws and best practices.

Some background
Non-compete agreements exist, in large part, to protect an employer’s customer relationships, confidential information and trade secrets. Customer relationships, of course, are the life-blood of a for-profit company. If an employer has entrusted an employee with maintaining a customer relationship, that relationship is often a legally protectable interest. A company’s confidential or proprietary information and trade secrets may include intellectual property (such as inventions and formulas), as well as the company’s business plans, and pricing information, or a nonpublic customer list.

Case law aptly describes the situation where an employer entrusts an employee with confidential information or customer relationships in terms of war – i.e., economic war: in entrusting an employee with a customer relationship or secret information, the employer places “weapons” in the employee’s hands, which the employee could then turn around and utilize in a competitive fashion against the employer after the employee leaves. Non-competes are intended to protect the employer from an employee who seeks to engage in such warlike behavior.

Will it hold up?
Having an employee sign a non-compete is one thing; enforcing the restriction is quite another. If an employer can establish that it has a legitimate interest in protecting certain confidential, nonpublic information, or unique customer relationships, to which a former employee had access, then a court is more likely to enforce a non-compete or non-solicitation agreement – the latter is similar to a noncompete but instead of preventing a former employee from working for a competitor or in a particular field, it prevents the former employee from soliciting customers or employees from their former employer. If the employer cannot establish that it has a legitimate business interest that requires protection, then the agreement is not likely to be enforced. Courts will scrutinize an employer’s claimed interest to ensure that it is actually one that is protectable, and not merely an attempt to keep its former employee from working for a competitor.

The restrictive covenant also has to be reasonable in scope, in terms of the length of time and geographic area to which the restraint applies, and it can’t unduly restrict the employee from working. What is considered reasonable varies from jurisdiction to jurisdiction. The current trend is for states to limit or even prohibit non-competes in terms of time, types of employees that can be restricted, certain professions, or whether an employee is terminated or quits. The past few years have seen numerous attempts at limiting or banning non-competes in many states – and even at the federal level, where a bill limiting non-competes was introduced in 2021 but did not pass Congress. For example, in Rhode Island and Maine non-competes cannot be enforced against hourly employees and others, including students, those 18 and under, those earning less than 250 percent of the federal poverty level, and nonexempt (i.e., hourly) employees under the Fair Labor Standards Act. Massachusetts has limited non-competes in many respects, including a maximum time restriction of one year, and requiring payment to the former employee during the restricted period. California was the first – and so far, only – state to completely ban non-competes.  

Limit who signs a Non-Compete Agreement
The more specialized an employee’s role, the more likely it is that a non-compete will hold up if the employee leaves to work for a competitor. That’s because higher-level, more specialized employees typically have access to sensitive or confidential information, or have customer relationships, whereas an administrative assistant (for example) cannot hurt the employer by going to work for a competitor because their skills are interchangeable from one employer to the next, and while they may have access to confidential information about customers, they typically cannot use that information in a competitive fashion. Moreover, those employees are usually signatories to confidentiality and non-disclosure agreements which prevent them from disclosing a former employer’s sensitive information. This is one reason several states are now prohibiting non-competes for hourly workers.

So employers should not automatically give the same type of non-compete to every employee, because that waters down the employer’s argument that the agreement is necessary, and makes it less likely to be enforced. A court will likely question why an employer would need to give a strict non-compete to someone who, for example, doesn’t have confidential information about the inner workings of the organization or doesn't have any customer contact. Those workers should instead be subjected to non-solicitation and non-disclosure covenants, as opposed to non-compete agreements.

The Employee Perspective
Because of the tight labor market, employees are in a much stronger bargaining position now than a few years ago. Most tend not to want to work for an organization that puts them under an extremely restrictive non-compete agreement. Employees are therefore more likely these days to negotiate the terms of a non-compete before they accept a position.

When properly executed, reasonable in scope, and put in place to support a legitimate business interest, non-competes can be effective tools for protecting company interests and retaining talent. In this tight labor market, flexibility, customization, and ensuring that the document is legally enforceable can provide an employer with some comfort that when it lands its next big hire, that employee cannot later use the “weapons” the employer provides to the employee – i.e., the confidential information and customer relationships with which the employee is entrusted – against the company.

A version of this article first appeared in the Providence Business News on October 28, 2022.

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