The War On Non-Competes: Are They Enforceable?

Non-compete agreements have become a common tool to protect employers from employees that leave and use what they learned to compete against their former employers. A non-compete typically prohibits a former employee from working for a competitor or starting a competing business for a set period of time (often six months to two years) in the area where the former employer does business.

A non-compete limits an employee’s future employment options, keeping them from leaving their current employer to seek a new job, start a competing company, or working in the same industry as their former companies. As a result, non-competes are often interpreted very narrowly and have been found unenforceable if they are too broad, cover too large an area, or are for an extended time period. The courts also often require the former employee to justify the need for a non-compete, such as protecting trade secrets or confidential business information.

In recent years, non-competes have been under increased scrutiny, with state and federal legislature and agencies questioning their enforceability. Four states, California, Minnesota, North Dakota and Oklahoma, have banned non-compete agreement, and New York recently passed a prohibition prohibiting non-compete agreements. Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington proscribe non-compete agreements unless the employee earns above a certain salary threshold. Other states, like Iowa and Kentucky, limit the use of non-competes for certain professions such as lawyers, physicians, and other healthcare workers, effectively banning non-competes for all other industries.

The federal government has also considered restricting non-competes. The Federal Trade Commission (FTC) has proposed a rule that would universally ban the use of non-compete clauses in employment contracts across all industries. The proposed rule, announced by the FTC in January 2023, is based on a preliminary finding that non-competes constitute an unfair method of competition. The FTC’s new rule would make it illegal for an employer to enter into a non-compete with a worker, or to enforce existing non-compete with a worker. The rule has yet to be finalized, and, if implemented, it will likely be challenged in the courts and implementation could be significantly delayed.

Moreover, the general counsel of the National Labor Relations Board (“NLRB”) issued a memorandum stating that “non-compete clauses; no solicitation clauses; no poaching clauses and other provisions” constitute an unlawful labor practice under the National Labor Relations Act unless they are “narrowly tailored to special circumstances justifying the infringement on employee rights.” Like the FTC proposal, the NLRB limits the justification for a non-compete, and stated that non-competes on “low-wage or middle-wage workers who lack access to trade secrets or other protectible interests” are likely unenforceable.

An NLRB general counsel memorandum is not binding law, but outlines the theories that the general counsel will pursue. Accordingly, all flooring retailers and contractors need to review their use of non-competes, whether in a state that prohibits non-competes, limit their application, or have yet to pass legislation restricting non-complete. By reviewing their non-competes now, flooring retailers and contractors will be able to make any necessary future adjustments if the proposed FTC band on non-competes is ever implemented or the dealer’s state imposes new restriction.

Recommendations for Employers

While many states still allow the use non-compete agreements, courts and governmental agencies are increasingly declining to enforce non-compete agreements if they are unreasonably broad or cannot be justified. Flooring retailers and contractors should consider taking the following actions:

Know The Law In Your State?

Restrictions on non-compete agreements vary from state to state. Some states limit the types of employees or set a minimum salary, set a maximum duration, or what type of information that can be restricted. The states also vary when a non-compete can be imposed. Louisiana and Alabama statute provides that non-compete agreements may not be entered into before employment has begun, while other states, such a Colorado and Illinois, require a non-compete agreement be presented to the employee at least 14 days before employment begins. Similarly, some states, like Alabama, require the non-compete be in a separate signed agreement, while other states, including Illinois and Massachusetts, also require the agreement to include a provision that expressly states that the employee has a right to consult with counsel before signing the agreement. Other states do not specify the need for a signed written agreement. It is important to know these unique limits and requirements in each state that a flooring retailer or contractor operates.

Are You Protecting A Legitimate Business Interest?

A basic issue raised in reviewing non-compete agreements is what legitimate business interests are being protected. Employers should be able to identify the business interests that require the protection of a non-compete agreement, such as a company’s confidential business information, client lists, vendor relationships, investments, product development, and other confidential information. It is key to check what limits are imposed by state law.

Many states allow a non-compete to prohibit a former employee from soliciting customers during the term of the non-compete. In contrast, other states, such as Colorado and Montana, specify that the former employer cannot prohibit soliciting customers.

Which Employees Need To Sign?

Employers should only use non-compete agreements with employees whose departure would actually pose a risk to the business interests protected. A court might consider whether the employee was a key employee, whether the employee possessed significant confidential information, or whether the employer invested significant expense or resources in providing education or training to the employee.

You must also know what limits your state law may impose. For example, in the state of Washington, a non-compete cannot be imposed on employees earning less than $116,593.18. Similarly, the salary limit in Colorado is $101,250, and $108,575.64, in Oregon. Other states, such as New Hampshire set the limit based on two times the minimum salary, and Rhode Island sets it at 2.5 times the federal poverty level. In Nevada, non-competes are unenforceable against hourly employees, and in Massachusetts are limited to employees who are exempt from overtime under the Fair Labor Standards Act.

Is The Non-Compete Limited in Duration?

Another common reason that courts refuse to enforce a non-compete is that the agreement restricts the employee from competing for an unreasonably long amount of time. The duration of the agreement should not exceed the time reasonably necessary to protect the employer’s legitimate business interests.

What is considered reasonable varies according to the facts and circumstances surrounding the agreement. Some states set a maximum time limit. Oregon, for example prohibits non-competes that exceed 12 months, Washington presumes a term of 18 months is unreasonable, and Louisiana has a two year limit.

Other states limit when a non-compete can take effect. In Maine, a non-compete entered into after September 18, 2019, will not apply unless the employee was with the company for at least one year. Even without such a law, most courts will consider the duration is reasonable. As a general rule, six months is likely to considered reasonable, and any time over 2 years will be suspect.

Is The Area Reasonable?

Non-Competes usually describe a restricted area in which the employee cannot compete, such a certain distance from the employer’s facility or in certain counties or towns. The geographic area covered in a noncompete agreement must not be larger than is reasonably necessary to protect the employer. Courts will not enforce a non-compete if it covers too broad of a territory. Whether a geographic limitation is reasonable will depend on where its potential clients or customers are located as well as on the locations where the employer is doing business.

Generally, most courts will not enforce a noncompete that covers an area where the employer has no clients or business interests. Like determinations of a reasonable duration for a non-compete, the geographic restriction should be tailored to your business, and circumstances.

And check state law to see if there are any restrictions. Louisiana, to illustrate, requires the restriction identify specific parishes, municipalities or other area and is limited to the geographic area where the employer conducts a similar business.

Did The Employee Get A Benefit?

The courts will often consider whether the non-compete was simply imposed without providing the employee with anything of value in return. Generally, providing a job offer is sufficient consideration, but imposing the restriction on current employees can raise questions. Many state laws specify that continued employment is not sufficient consideration.

Is The Scope Reasonable?

A noncompete agreement cannot be too broad. A prohibition for working for another local flooring retailer may be permitted, but prohibiting working for any retail in construction supply business may be too broad. Similarly, prohibiting an employee from working in the flooring industry would likely be too broad and unenforceable.

Consider Alternatives to Non-Competes

If in a state that outright prohibits non-competes or limits their use to specific industries, there are several alternatives that provide safeguards for a businesses. Even if in a state that has less restriction, flooring retailer and contractors may want to consider using these alternatives to avoid the concerns raised with non-compete agreements. If a non-compete agreement is ruled too board or otherwise unenforceable, the employer may have no protection unless it has included these alternative safeguards.

Non-Disclosure Agreements (NDAs) And Confidentiality Agreements (CAs).

NDAs and CAs are contracts designed to protect confidential business information, client lists, vendor relationships, investments, product development, innovative practices, proprietary software, and other confidential information. By signing an NDA or a CA, employees agree to keep such information confidential during and after employment.

It is key that the NDA and CA clearly define what confidential information is covered. NDAs and CAs focus solely on protecting confidential information, allowing individuals to pursue their careers by working for competitors or starting their own ventures. As a result, the courts often are less skeptical of NDAs.

A key disadvantage of NDAs and CAs is that the employer will have to prove that the former employee used the confidential information. In contrast, to enforce a non-compete, all that needs to be proven is that the former employee is working for a competitor or starting a competing business in the area specified in the non-compete agreement.

In addition, if clients follow the former employee on their own, NDAs and CAs may not provide any protection. As with non-competes, the flooring retailer and contractor needs to check the law in their states, as some states restrict what can be included in an NDA or CA.

Non-Solicitation Agreements.

Non-solicitation agreements prevent former employees from soliciting the flooring retailer or contactor’s clients, customers, or other employees. Non-solicitation agreements safeguard the former employer’s interests without impeding employee’s changing jobs or starting a new competing business.

Non-solicitation agreements have limits. If clients, employees, or vendors follow the former employee on their own, a non-solicitation agreement may not provide any protection. The agreement prohibits the former employee from poaching client, vendors, and employees, not accepting business they did not solicit. And again, state restrictions need to be understood. Colorado and Montana, for example, do not allow agreements that prohibit soliciting customers.

“Claw-backs” Provisions.

Claw-backs allow an employee to recoup funds they invested in an employee’s training or education if they leave the company within a specified period. The period and the amount recouped must be reasonable. A claw-back that required repayment of the full amount of the training costs after three years would likely be unreasonable. To avoid these issues, flooring retailers and contractors should consider specify the amount that needs to be paid back based on the length of post training employment.

For example, the agreement could provide the employer must pay 100% if they leave within 3 months, 75% if leave after 6 months, 50% at 12 months, 25% after 18 months, and 0% if stay for two years or more.

Forfeiture-For-Competition

This contract provision provides an employee who leaves to join a competitor or to start a competing business will forfeit a benefit, such as deferred compensation, future payments, incentives, and accrued vacation. This provision creates a consequence for competing, rather than prohibiting such competition. As with all contracts, state law needs to be reviewed to determine whether such a provision is permissible and whether there are any restrictions on such provisions. For example, a number of states do not allow the forfeiture of accrued vacation.

“Garden-Leave” Provision. An employer can pay a departing employee to not work for a period of months. While not as common in the United States, these clauses are used widely in Europe, where non-compete clauses often cannot be enforced.

Conclusion

As federal agencies, state legislatures, and the courts are increasingly becoming skeptical of non-competes, flooring retailers and contractors should review with competent legal counsel any non-competes it has with its employees to ensure the agreements are reasonable and meet state limits. Alternatives to non-competes may provide protection of a flooring retailer or contractor’s confidential business information. While a non-compete or alternative provision will not be needed for every employee, flooring retailer and contractor should consider the best means of protecting that its key confidential business information that is consistent with state law and will likely to be upheld by the courts.

The information contained in this article is abridged from legislation, court decisions, and administrative rulings, should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. ■