The Bloomberg Editorial Board recently published an article entitled “Too Many Workers Are Trapped By Non-Competes” arguing that the practice of requiring relatively low-wage and/or unskilled workers to sign non-compete agreements is a drag on the economy and is contributing to wage stagnation. The article contends that restricting unspecialized workers’ ability to freely change jobs hinders competition in the marketplace and decreases worker bargaining power.
An economist could best say whether the article’s assessment of the effects of non-compete agreements on low-wage workers and the U.S. economy more generally is accurate. But as a lawyer who frequently deals with non-compete agreements it is easy to highlight some risks for companies who use non-compete agreements with unspecialized workers en masse.
The first problem is that some state attorneys general have recently come after employers using this practice. Take for example a nation-wide sandwich chain that required its hourly employees to sign an agreement which prohibited workers during their employment and for two years after from working at any other business that sold “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” within two miles of any the chains locations in the United States. The New York Attorney General opened an investigation into the company and the Illinois Attorney General filed a lawsuit against it alleging violations of state law. The company settled both matters by, among other things, agreeing to stop requiring workers to sign such agreements (at least in those two states).
Another example of reportedly ubiquitous use of similar agreements attracting litigation is popular west-coast fast-food chain which was sued for allegedly requiring many of its workers to sign agreements containing strict anti-poaching provisions. They were effectively prevented from going to work at other fast-food restaurants – which is normally quite common for this group of employees. These kinds of requirements on lower-level workers has attracted very public enforcement actions, and likely will continue to do so.
Another problem is that some states now (and more may soon) have legislation prohibiting the use of non-compete agreements for low-wage and/or relatively unskilled workers. For example, the Illinois Freedom to Work Act prohibits applying “covenants not to compete” agreements on anyone earning less than the greater of: (1) the hourly rate equal to the minimum wage required by the applicable federal, state, or local minimum wage law, or (2) $13.00 per hour. Other states, such as California, Oklahoma, and North Dakota, generally prohibit nearly all non-compete agreements no matter the employee’s position or pay rate. Several other jurisdictions have also recently considered legislation that would restrict the use of non-compete agreements, including states like Pennsylvania, New Hampshire, Vermont, Washington, and cities like New York.
An additional issue with using non-competes with low-skill or low-wage workers is that they may not be enforceable as written or may cost more to enforce than they are worth. These agreements can be tricky to write correctly from state to state, and the costs associated with enforcing a non-compete agreement will most likely be in the tens of thousands of dollars in even the best-case scenario – and often even greater. The filings and hearings required take a considerable amount of time to complete even for lawyers experienced in handling these types of cases, not to mention the distraction to company officials required to prove the claim.
This leads some companies to think, “Well, I can just have the employees sign a non-compete agreement and let the mere looming threat of the company possibly enforcing the agreement discourage them from violating it.” But issues with that approach are obvious, including that once the word gets out, the threat disappears. Plus, sometimes an employee will sue the company to invalidate the agreement. The company must then spend money defending a lawsuit, possibly against an employee that it never even intended to enforce the agreement against, or else the whole thing collapses like a house of cards.
Overall, whether a company should use non-compete agreements with particular employees or various levels of its organization is a business decision that needs to take several factors into consideration. But a one-size-fits-all approach is rarely going to be the best strategy.