Businesses are facing increasing pressure to get rid of non-compete clauses in worker contracts as states and the courts chip away at the practice. Once a mainstay for companies, these provisions have increasingly become a liability.
Non-competes are clauses in employment contracts that prevent workers from taking jobs with rival companies for set periods of time. Originally created as a way to protect trade secrets, their use became widespread in recent decades, but businesses are rethinking them now.
“Companies are now taking a careful look at their agreements to make sure that all of their employees are covered by the agreements and they are not being carved out by these state laws and that the agreements are generally up to snuff,” said a lawyer for a Massachusetts-based management side firm that consults on non-compete clauses, who asked not to be named because she has related business before the state.
Non-competes, in theory, protect a company’s investments in worker training and curb the loss of things like client lists. Critics argue their main purpose is to hold wages down by limiting workers’ ability to sell their skills to highest bidder.
President Obama pointedly took aim at non-competes in a 2016 executive order, saying they “narrow the employment options for an estimated one in five workers in the United States.”
That was as the administration was heading out the door, though. The order urged state governments to tackle the issue, rather than directing federal agencies to take it up. The Trump administration hasn’t shown a similar interest in the issue.
Sens. Elizabeth Warren, D-Mass, and Cory Booker, D-N.J. introduced legislation limiting the use of non-competes this year, but the Republican leadership has not taken it up.
At the state level, Obama’s order has caused ripples. After wrestling with the issue for months, Massachusetts passed a wide-ranging law in August that limited non-competes to no more than 12 months and prohibited them from being enforced against employees who were fired, laid off or who qualify for overtime.
The biggest change was that it required employers to pay 50 percent a workers’ base salary for as long as the non-compete is in effect, unless the worker gets employment elsewhere, among their provisions. Dubbed a “garden leave” provision, it gives such contracts a potentially serious downside. Employment lawyers are watching whether the practice catches on.
Thus, while Massachusetts doesn’t prohibit non-competes, it changes companies’ calculus for using them. Similar legislation is pending in New Jersey, and was also proposed in statehouses in Pennsylvania, New Hampshire and Vermont.
Also in August, the Nevada Supreme Court set a similarly high bar, ruling that non-competes had to be limited to the geographical area in which the employer has business interests and, more significantly, that employers had to provide “substantial evidence” to the court that the terms of the non-compete would likely be found reasonable at trial, placing the burden of proof squarely — and heavily — on the employer.
Employers’ ability to get their agreements enforced has already gotten steadily worse. “We’ve seen a trend of courts being less and less willing to enforce non-competes,” the business lawyer noted.
State attorneys general have also been targeting a lesser-known non-compete practice: Franchise “no poach” contracts that prohibit businesses from hiring away another franchisees’ workers.
In late August, Washington State Attorney General Bob Ferguson announced that eight franchises — Applebee’s, Church’s Chicken, Five Guys, IHOP, Jamba Juice, Little Caesars, Panera and Sonic — would no longer nationally enforce non-compete clauses in their franchise contracts. Earlier this summer, Arby’s, Carl’s Jr., McDonald’s, Jimmy John’s, Auntie Anne’s, Buffalo Wild Wings and Cinnabon made similar pledges following an inquiry by a coalition of state attorneys general.
“My goal is to eliminate no-poach clauses in the fast-food industry nationwide,” Ferguson said. “This is a major step forward in achieving that goal, but we’re not done. Other fast food companies that use no-poach provisions are now on the clock to accept a similar deal or face litigation from my office.”
An official at top service industry trade association, speaking on the condition of anonymity, said that companies are “taking the issue very seriously. … It has heated up in the last few months and really become a problem.”
The provisions were only meant to prevent the poaching of the higher-skilled management employees, the source added. Franchisors used the clauses mainly to prevent conflicts among owners within their chains but rarely enforced them. Few corporations are willing to cling to the clauses now.
The problem for the franchisors is that including such provisions in franchise contracts could be interpreted as establishing control over a franchisees’ hiring policies, and therefore making the corporation legally liable for any violations.
“It would seem to me that no-poaching agreements, if they are legal, raise a serious question as to whether there is a ‘joint employer’ relationship between the franchisor and franchisees,” Princeton economic professor Alan Krueger, a former economic adviser to Obama, told the Washington Examiner.
The Obama administration pushed expanding the ‘joint employer’ doctrine by loosening the standard for when corporation can be liable. The Trump administration has tried to roll that back, but hasn’t been entirely successful thus far. Federal agencies aren’t likely to pursue joint employer cases, but private sector groups potentially can.
That’s a possible goldmine for class-action lawyers seeking deep-pocketed defendants. Unions would benefit, too, since it would allow them organize an entire franchise at once by targeting the corporate headquarters. As a result, fast food companies are ready to drop the practice more quickly.
