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Non-compete contracts protect your future
A 2016 report published by the White House notes that 18% (30 million) of working Americans are subject to non-compete agreements in their current positions, and 37% say they’ve been subject to a non-compete at some point in their career.
In states where they are allowed by law, non-compete agreements can be an effective tool for providers to protect critical business information and maintain professional relationships when key employees move on to other organizations. It’s especially important when considering the connections marketing and business development personnel might cultivate on your behalf.
Providers must be careful when drafting such documents, however, as overreaching or poorly worded agreements run the risk of being thrown out in court.
To gain a better understanding of the types of positions that should be covered by non-competes where applicable and what should be included in such agreements, Behavioral Healthcare Executive (BHE) recently spoke with Peter A. Steinmeyer, managing shareholder and a member of the firm in the Employment, Labor & Workforce Management practice at Epstein Becker Green. Steinmeyer is a co-leader of the firm’s Non-Compete, Unfair Composition and Trade Secrets strategic initiative.
BHE: From the perspective of the employer, what are the pros and cons of having employees sign non-compete agreements?
Steinmeyer: Every state is different with respect to non-competes. In appropriate circumstances, they’re a tool to protect confidential information, strategic plans and customer relationships. The cons are that like any other aspect of compensation, some people will view the requirement to sign a non-compete as a negative. It might hurt a given employer in attracting certain persons.
BHE: Given that potential employees could view signing non-compete agreements unfavorably, do organizations need to compensate employees with a cash bonus when they sign them?
Steinmeyer: Again, every state’s laws with respect to non-competes are different. You do need to provide some consideration for a non-compete. In some states, an offer of employment or continued employment for a reasonable duration is sufficient. In some states, an employer would be better off offering a cash bonus, stock options or promotion in addition to mere employment, but it varies from state to state.
BHE: When an applicant is offered a position and asked to sign a non-compete agreement as part of their acceptance, can they refuse to sign the non-compete?
Steinmeyer: In most states, if an employee will not sign a non-compete, the employer has the option of withdrawing the offer. In some states, such as California, it is inappropriate to even ask an employee to sign a non-compete. In other words, merely asking violates California law. But in most states, an employer has a choice. If the employee doesn’t want to sign, the employer can waive the requirement or the individual and employer can go separate ways.
BHE: What must be included in a non-compete agreement?
Steinmeyer: There are different types of non-competes. A traditional non-compete is an agreement that says, in effect, “thou shalt not work for a competitor in certain capacities for a limited period of time.” There are other types of non-competes, including a customer non-solicitation agreement, which merely restricts the ability to solicit certain customers for a limited time. There can also be non-competes which limit the ability to recruit co-workers for a limited period of time. When looking at what should or should not be in a non-compete, the first question is: What type are you talking about?
Regardless of the type, the restrictions need to be drafted as narrowly as possible to meet the employer’s legitimate business needs. In practical terms, that means the restrictions have to be for a reasonable length of time, they must be supported by a legitimate business need and not just a desire to suppress competition, and they should be no broader than necessary to protect that legitimate business purpose.
In terms of what should or should not be included, truly every situation is different. Employers should talk to someone knowledgeable in this area of law, or else they run risk of having an agreement that isn’t worth the paper on which it is printed.
BHE: What is an example of a legitimate business need?
Steinmeyer: A legitimate business need would be protecting confidential and highly sensitive information such as strategic plans and opportunities, or protecting critical customer relationships.
BHE: Conversely, what is an example of an attempt at claiming a legitimate business need that would not hold up in court?
Steinmeyer: We call this ‘the janitor problem.’ That would be a non-compete so broad that it would bar someone from working in any capacity anywhere for a competitor—even as a janitor on the South Pole —regardless of whether such a restriction actually protects a legitimate business concern ... And yes, I’ve seen agreements that broad.
I recently handled a situation in the medical field in which an employer was trying to enforce a non-compete against an employee who had moved to a state where the former employer doesn’t even operate anywhere within 700 miles.
People will draft non-compete agreements without thinking about how a judge is going to look at it five years from now when the employer might actually want to enforce it, which is why people need to think about them critically at the time they draft them and before they have somebody sign it. Otherwise, five years from now, you will be standing in front of a judge trying to enforce an agreement that looks ridiculous.
BHE: Have you observed any trends in the way the law has evolved with regard to how many states regulate non-compete deals?
Steinmeyer: Because the law regarding non-competes is state-specific, it’s tough to draw 50-state conclusions, but I will say on the whole, judges are carefully scrutinizing non-competes. And that is particularly true with respect to lower-wage and lower-level employees. For example, Illinois passed a statute in 2016 which bans non-competes for employees who make less than $13 an hour. Similarly, in 2016 the Obama administration issued a paper in which it urged states to take action with respect to non-competes for lower-wage employees. It is unknown what attitude, if any, the Trump administration will have toward non-competes. Non-competes don’t fit predictably on the usual red state/blue state divide. Oklahoma, which is one of the reddest of the red states, bans non-competes by statute, as does California, one of the bluest of the blue.
BHE: How do you enforce the agreement with a former employee who might be in violation of the terms of a legitimate non-compete?
Steinmeyer: I usually recommend employers take three steps. At the employee’s exit interview, they should be reminded about their post-employment restrictions and the need to return all company property and information. Then, if the former employer learns of an apparent violation, I would generally recommend a letter be sent to the former employee again reminding them of their obligations and seeking assurance that they are in compliance. Finally, if no such assurance is provided or it’s clear there has been a violation, the former employer has the right to go to court to seek injunctive relief.
BHE: In what situations might a non-disclosure agreement be a better option than a non-compete?
Steinmeyer: In a state such as California, North Dakota or Oklahoma, where by statute non-competes aren’t enforceable, your only option is a non-disclosure agreement. In other situations where an employee is unwilling to accept a position if they have to sign a non-compete or where market conditions are such that asking an employee to sign would damage your ability to attract top talent, then the employer would be better served with only a non-disclosure agreement and not a non-compete. This goes back to the fact that employers need to provide market compensation in order to attract and maintain the best employees, and a non-compete is frequently viewed as a negative by prospective employees when evaluating a job opportunity.
Tom Valentino is Senior Editor of Behavioral Healthcare Executive.
