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Employers should proceed cautiously in requiring employees to sign noncompete agreements, despite the likely absence of any pressure on this issue emerging from the incoming Trump administration.
To avoid potential problems, experts advise employers to fashion any noncompete agreements as narrowly as possible, both in terms of geography and duration.
The term “noncompete agreements” is often used, somewhat inaccurately, as a catchall phrase to loosely refer to all types of restrictive covenants — not only those that forbid moving to a competitor, but also those that seek to prevent former employees from soliciting their former employers’ clients or colleagues.
While experts disagree as to the extent of recent increases in the use of noncompete agreements, it is often an issue among insurance brokers because of the business’ heavy reliance on personal relationships (see related story).
On Oct. 24, the Obama administration called on states to reduce noncompete agreements’ impact with a “State Call to Action on Non-Compete Agreements,” which said noncompetes affect 30 million workers, or about one in five. It said states that strictly enforce noncompete agreements have lower wage growth and lower mobility than those that do not.
This followed a report critical of noncompetes that was issued by the White House in May, which in turn cited a March U.S. Treasury Department report on the issue.
But whatever influence the Obama administration may have otherwise had on the issue has likely largely dissipated with Hillary Clinton’s election loss.
“A Trump administration will not maintain the Obama administration’s very clear hostility toward noncompetes,” said Christopher P. Stief, regional managing partner with Fisher & Phillips L.L.P in Philadelphia.
Employers, though, must still be alert to state laws on the issue. These vary widely, with California at one end with strict laws limiting their use, and Florida at the other with legislation designed to make restrictive covenants easier to enforce, he said.
“When well-crafted and used correctly, they do a great job” of protecting firms from the theft of important trade secrets and confidential information, said Mary Goodrich Nix, a partner with Holland & Knight L.L.P. in Dallas.
But, we are “seeing more consideration from a company perspective as to whether they really want to be using a noncompete or not, especially if they’re really not going to enforce it,” said Dabney D. Ware, of counsel at Foley & Lardner L.L.P. in Jacksonville, Florida.
One issue that has arisen in regard to noncompetes is their use with low-salaried or hourly workers. In June, Champaign, Illinoisbased Jimmy Johns Franchise L.L.C. agreed to stop distributing sample noncompete agreements in hiring packets it sent to its franchisees after New York Attorney General Eric T. Schneiderman said they were unlawful.
Some experts believe it makes little sense for low-wage workers to sign these agreements.
“They’re legally unenforceable anyway in most states. You have to have some real proprietary information to enforce one,” said Patrick J. Keating, a partner with Roberts, McGivney Zagotta L.L.C. in Chicago.
However, “I don’t think that you can have a bright line rule banning noncompetes for a job category,” said Jeffrey A. Lehrer, a partner with FordHarrison L.L.P. in Spartanburg, South Carolina.
An hourly restaurant worker, for instance, could have “significant confidential information about recipes and processes,” Mr. Lehrer said.
Experts recommend noncompetes be tailored as narrowly as possible. Do not say to employees, “I’m going to have you under a noncompete for 10 years, and it’s going to cover the entire planet,” said J. William Manuel, a partner with Bradley Arant Boult Cummings L.L.P. in Jackson, Mississippi.
“Draft agreements that are reasonable in scope and in time. In other words, the best advice is to not overreach,” said Thomas E. Wallerstein, a partner with Venable L.L.P. in San Francisco.
“Employers should draft noncompete and other restrictive covenant agreements narrowly to address their legitimate business interests,” said Clifford R. Atlas, a principal with Jackson Lewis P.C. in New York.
Noncompete agreements are commonly used by insurance brokers because the business is so relationship-driven, which is a key focus of many of these agreements, experts say.