Non-compete agreements have become as common in American workplaces as front lawns in American suburbs—so common that it is easy to forget they were not always there. So when President Biden recently announced that he wanted to work with Congress to ban non-compete agreements in America, employers and employees alike were taken aback.
In this article, we will review what non-compete (or non-competition) agreements are and why they have become so common. But then we’ll discuss why the world may not look so different once they’re gone.
What Is A Non-Competition Agreement?
Employment agreements often contain what are called “restrictive covenants,” which are promises by the employee to the employer about how the employee will and won’t behave once they leave a job. Restrictive covenants comes in three main flavors:
1. CONFIDENTIALITY AGREEMENTS / NON-DISCLOSURE AGREEMENTS (OR “NDAS”)
This is a promise by an employee not to use sensitive or confidential information they learned from their employer. An employee might learn, during her employment, some of her company’s trade secrets, or some of its non-public business plans, or maybe just some gossip about its CEO. The company doesn’t want to lose control of any of that information—any more than it wants to lose any other property that it owns, and so it protects itself by asking the employee to sign an NDA.
2. NON-SOLICITATION AGREEMENTS / NON-INTERFERENCE AGREEMENTS
This is a promise by the employee not to poach his company’s customers, or other employees, after he leaves. A company works hard to create its roster of clients, and to staffs its various departments, and it does not want an employee to steal its Rolodex. One notable variety of such agreements is the “No-Service Agreement,” in which the employee promises not to later work for any of his employer’s customers or clients—which is just another way of a company making sure the employee don’t steal for himself a line of business developed by the company.
And then, finally:
3. NON-COMPETE AGREEMENTS
These are agreements by the employee not to work for any of her company’s competitor’s. The classic example would be an apprentice, going to work in a small town, and promising not to open up a business across the street from her mentor when the apprenticeship ends. But in contemporary America, at least some companies in every industry—from fast food to finance—not to work for their competitors.
As a general rule, courts won’t enforce any restrictive covenant unless it is reasonable. But a restrictive covenant that limits a person’s career for years and years, or forces them to move half way around the world to stay in the same industry, or that puts a person out of her chosen line of work simply is not reasonable.
So why would an employer ask its employees to sign a broad non-compete clause, even though a court might not enforce it? Mostly, employers ask employees to sign non-compete clauses because they can. The employer doesn’t need to sue its former employees, to keep them from going to competitors: because most employees don’t have their own lawyers, most employees don’t realize that their non-competes may be unenforceable. The fear of a lawsuit is usually enough to keep them in line.
This is why President Biden’s proposal is so interesting: It would tell employers, No, you can’t. It would prevent employers from achieving through fear and intimidation what they cannot achieve through courts.
Would a Ban on Non-Compete Agreements Change Anything?
Even if non-compete agreements are banned, NDAs and non-solicitation agreements will still be legal—which means that companies will still have viable ways to make sure that their former employees don’t steal the recipe for the secret sauce, or download a copy the customer list. In other words, there are really only two kinds of lawsuit that will go away, if President Biden’s proposed ban becomes law:
- Lawsuits filed out of spite against former the employee, where the leaders of a company sue her just to punish her for leaving.
- Lawsuits filed out of anticompetitive spirit, where the the leaders of a company sue their former employee just to deprive their competition of talent
But spite is not what the courts are for; and competition is what America is built on. No one will miss these (already rare) of lawsuits. What will be gained in their place, however, is a freedom of movement, from job to job, that should be every American’s right.
California has been a leader in this movement. For one hundred and fifty years, California has banned most non-compete agreements (as well as many non-solicitation agreements). The ban is currently codified in California’s Business and Professions Code 16600. It is hard to argue that non-competition provide any net benefit to the American economy as a whole once you realize that Silicon Valley, and Hollywood, were built without the benefit of any such agreements.
How Companies Can Protect Themselves Without Non-Compete Agreements
Besides, there are better ways for any company the achieve the goals that companies outside California achieve with non-competes. Here are three humane ways for employers to keep their competitors from benefiting from their investments in training and know-how for employees, without damaging the lives and livelihoods of their workers:
GARDEN LEAVE:
Garden leave is basically a paid non-compete period. Here, an employer keeps an employee on payroll for a certain number of months after the end of the employee’s job. During the garden leave, the employee may look for work, but may not actually start a new job—essentially letting the employee maintain their career momentum, while giving the employer a chance to hire new talent before their old talent goes to their competitor.
CONTINGENT PAYMENTS:
Contingent payments allow an employer to make post-termination payments contingent on certain circumstances (like not working for a competitor). While it is very hard for an employer to accuse an employee of breach of non-compete and sue and win, it is very easy for an employer to merely accuse an employee of breach and then simply not pay. We have seen more and more employers tie future vesting and deferred compensation to non-competes. This also allows the employee to make a financial decision about whether taking a competitive position is worth it.
TREATING EMPLOYEES BETTER:
This is the simplest option and the best. If an employee is happy with their employer, they are much less likely to leave, let alone leave and go to a direct competitor, poaching customers and divulging proprietary information along the way.
At the outset, we said that non-compete agreements were like lawns: so common that they’ve become invisible. But American homeowners did not always have to maintain a square of grass every time they moved into a new house, and American workers did not always have to promise where they wouldn’t work tomorrow, in order to hold down a job today. We at Granovsky & Sundaresh like our lawns. But we look forward to a future when employees aren’t stuck with agreements that make no sense for today’s workforce.