What We Know

On May 5, 2016, the White House issued a report titled, “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” In its 16-page analysis, the White House criticizes the prevalence of non-compete agreements and the problems they cause, ultimately advocating for their reform. The U.S. Treasury published a similar report in March of this year.

Covenants not to compete, commonly called “non-competes,” are contracts that restrict an employee’s ability to work for a competing employer or in a similar field following an employee’s subsequent departure. Employers use non-compete agreements to guard against proprietary company information and trade secrets falling into the hands of a competitor.

The White House report briefly acknowledges the benefits non-compete agreements provide such as encouraging innovation, protecting company trade secrets, and increasing employer investment in worker training. However, the report ultimately concludes that the harm caused by non-competes outweighs any benefit they may provide. The report’s comment that “non-competes can play a beneficial role when used in a limited way” foretells the likelihood of impending restrictions in this area.

The report focuses on seven potential issues with non-compete agreements. As employers evaluate their own non-compete agreement practices, they should keep in mind these seven areas of concern in anticipating future reform regarding the use of restrictive covenants.

• Whether the worker (who signs the non-compete) is likely to possess trade secrets. The report notes that non-competes are not uncommon for low wage employees, and serve as a detriment by limiting the available subsequent employment options of those who possess a smaller range of marketable skills. The report cites proposed and enacted state legislation from across the country, which ranges from limiting the enforceability of non-competes against employees under a certain income threshold to limiting the reach of non-competes to apply only to employees likely to have insider knowledge and trade secrets. In evaluating the efficacy of a non-compete, it is advisable for companies to limit these restrictions to a certain salary threshold and to employees who possess proprietary knowledge about the company.

• Whether the employee signs the non-compete agreement before or after accepting the job offer. The report notes that job candidates who have accepted a job offer have less bargaining leverage than do job candidates who have not yet accepted. Further, it notes that occasionally, employers will have a job candidate accept his or her job offer before telling the candidate about the non-compete agreement. Thus, employers should evaluate whether their policies favor disclosing the agreement in the initial stages of the hiring process as opposed to the end stages. Employers should keep in mind that early disclosure of the company’s expectations regarding the execution of a non-compete improves an employer’s ability to overcome a later argument that the employer didn’t provide consideration to the employee in exchange for executing the restrictive covenant.

• Whether non-competes, their implications, and their enforceability are clear to workers. The report notes that employees may not realize they have signed a non-compete when accepting a job, nor do they understand its implications. Accordingly, employers should ensure that they fully explain non-compete agreements and surrounding details to employees.

• Whether the non-compete agreement is overly broad or unenforceable. The report highlights that some companies will ask workers to sign non-competes that are entirely or partly unenforceable in the applicable jurisdiction. It notes that states are taking three different approaches to handling this issue: (1) allowing employers to re-write non-compete contracts to conform with applicable state law; (2) striking the offensive language from the agreement while retaining the rest, or (3) voiding non-compete agreements when they contain any unenforceable provisions. Accordingly, employers should look to the requirements of their jurisdiction to determine any revisions they need make to their non-compete agreements. Jurisdictions which permit the rewriting of restrictive covenants refer to this practice as ‘blue-penciling’. North Carolina courts do not support the practice of blue-penciling.

• Whether the non-compete agreement provides consideration that is above and beyond continued employment. The report highlights the often ambiguous questions that arise concerning whether, when continued employment is sufficient consideration for a non-compete, the employment must continue for a certain length of time in order to constitute sufficient consideration. Some states require companies to provide consideration above and beyond continued employment. As such, employers should examine their specific state requirements to determine what constitutes sufficient consideration for non-compete agreements.

• Whether the non-compete agreement prevents workers from finding new employment after being fired without cause. The report highlights the negative implications restrictive covenants can have on workers post-termination, particularly when the job loss is without cause. Few states, however, have legislation preventing the enforceability of non-compete agreements under these circumstances. Employers may wish to evaluate their specific non-compete agreement language in light of the concerns expressed about this issue in the White House report.

• Whether the non-compete would have a detrimental effect on consumer health and well-being. The report highlights the medical field and the impact these agreements could have on the quality of care patients receive and their ability to retain medical providers of choice. Employers should look at whether their state enforces non-competes where a public interest exists.

While the report simply provides suggestions regarding non-compete agreements, employers can expect to see further reform in the realm of non-compete agreements at both the state and federal level. Ultimately, the White House report notes that the administration will continue to examine these agreements, their impact on society, and the ways in which they can be reformed. It is likely there will be further investigation by state and federal law and policymakers into the nature and scope of non-competes, which could noticeably impact employer policies and hiring procedures.

If you have questions about the impact of this report or any other matter relating to employment practices, please contact Connie Carrigan at ccarrigan@smithdebnamlaw.com.