Employee non-compete agreement developments continue in 2018
July 9, 2018
By Michael Burns, courtesy of SBAM Approved Partner ASE
ASE is following judicial and other developments in the areas of employee non-compete and no -poaching (also known as No-Collusion) terms normally used to restrict employee job hopping activity. As addressed earlier this year in ASE’s EPTW articles, the USDOJ continues to update its Anti-Poaching Agreement Position (4/18/2018) and Know Your Restrictive Covenant’s Terms and Definitions (4/23/2018). The courts and the government (both state and federal) are attacking employers’ freedom to contract with employees to protect valuable skills and knowledge obtained during employment.
Employers often will include non-compete terms in an upfront employment agreement. This term will restrict an employee’s subsequent employment from certain employers (perceived competitors) in a certain area and for a certain time. All terms must be “reasonable” to be enforceable in court. Restricting an employee from working in a particular industry job and area has to be limited. The same goes for the length of time a person is restricted from taking a job in a geographic area.
No-poaching agreements are a different form of employment restriction approach. No-poaching agreements typically are agreements between employers that state they shall not hire one-another’s employees. These types of agreements, except for a very narrow exception, are illegal.
The first half of 2018 has seen a number of developments. The Trump Administration, through the Department of Justice and the Federal Trade Commission, continues to pursue the Obama policy against no-poaching agreements as a violation of anti-trust law.
Employers should review their purchasing and other agreements for any terms that prohibit employers from recruiting from one another. This no-poaching term will be unenforceable and probably get the employer in deep legal trouble.
As has been the case for some time, courts are overturning restrictive non-compete agreements. An Illinois federal district court found a non-compete agreement between a staffing company and one of its division directors who had gone to a direct competitor illegal. The employer’s non-compete term stated the employee could not work in “any business” that “offers a product or services in actual competition with Medix … or which may be engaged directly or indirectly in the business of Medix.”
The federal district judge applied the pro-employee “janitor rule” which typically finds for an employee “if the restriction is so broad that it would prohibit an employee from working as a janitor for a competitor.” The judge looked for a “protectible business interest” to uphold the restriction on employment, and in this case did not find one.
If courts adopt such broad measures against a non-compete term, employers will be hard pressed to use them even in the most reasonable and business purposed way.
State legislatures continue to revise and restrict state laws on the use of non-compete agreements. Utah, Idaho, and Colorado all are rolling back the use of non-compete laws particular to certain industries or even key employees. Historically, if a key employee was put under a non-compete agreement there was no question about whether a significant business interest was present.
Lastly, so far this year, two state Supreme Courts changed their state’s legal positions pertaining to the use of non-compete agreements. Wisconsin’s Supreme Court ruled that its state law allowing non-compete agreements also could be applied to non-solicitation agreements and upheld a lower court’s finding that an agreement restricting employee’s soliciting another employee could be too broad to be enforced.
South Dakota’s Supreme Court found an agreement not to solicit customers went only so far as to restrict proactively selling to previous customers. The term did not prevent the salesperson from taking unsolicited calls and selling to previous customers.
Employers are advised to keep a watchful eye on their use of non-competes and to avoid any agreements between employers not to hire each other’s employees.