A client recently asked us to draft a non-competition agreement that would prevent entry level machinists from working for a competitor for one year following their departure from employment. When we asked the client about the reasons for requiring the non-competes, he responded that he was sick and tired of training employees and losing them to a competitor that promised marginally higher wages. We responded that use of non-competes in these situations could result in legal claims against the employer for restraint of trade.
Late last year, we reported on the latest settlement by the Jimmy John’s sandwich franchise with a state attorney general who alleged that the employer’s use of non-competes with restaurant workers was motivated by a desire to depress wages by keeping employees from leaving for better pay. A recent White House Council of Economic Advisors report identified non-compete agreements as a significant contributing factor toward wage stagnation in the U.S.
Even if the state or federal government decides not to pursue claims of abusive non-compete practices, employees can file class action lawsuits alleging violation of state unfair trade practice laws. In North Carolina as in many other states, these laws provide for awards of treble damages and attorneys’ fees in the event of violation.
Given these growing legal warning signs, how should employers make judgments with regard to non-compete agreements? The agreements should be limited to persons who present true competitive threats to the business based on their positions and access to the employer’s customers and confidential information. This typically means executives, salespersons, and employees with specialized technical information. Even for these employees, in many situations a customer non-solicitation and confidential information restriction can adequately protect the employer’s interests without resorting to a full blown non-competition agreement.
For lower level employees, often a confidential information agreement is sufficient to cover the employer’s true protectable interests. In the above scenario, we recommended that the client use a combination of a confidential information protection agreement along with structured retention bonuses to deter employees from moving to a competitor for small differences in hourly compensation. This alternative has the dual benefits of having a considerably better chance of being enforced, as well as avoiding possible legal claims over restraint of trade or unfair trade practices.
