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Reining In Noncompetes

WeWork Fulton Market facade, Chicago
WeWork Fulton Market co-working space, Chicago. Photo by Lisa Picard.

If you are a loyal customer at a particular sandwich shop, you may get to know the employees. You may even think a particular sandwich-maker delivers especially good service.

But if that sandwich shop employee got a new job at a different restaurant, miles away, it is the rare sandwich devotee who would even seriously think about following her.

The same goes for the barista who serves you coffee at your co-working space or the custodial staff who keep your offices clean. You may appreciate the work they do, but their departure from a company is unlikely to make you rethink your own routine. So you might be surprised to learn that they may be among the approximately 15 percent of workers without a college degree subject to noncompete agreements with their employers.

When deployed appropriately, noncompete and nonsolicitation agreements act as a reasonable solution to legitimate business problems. But when misused and overused, they are abusive and invite a political backlash – which is now brewing.

WeWork, a company that provides shared office rentals, once required “nearly all” of its workers to sign agreements not to work for similar businesses in the region within a year after departing their jobs. The affected workers included receptionists, food service workers and custodial staff. Under a recent settlement with the New York attorney general’s office, however, WeWork is stepping back from its original position; the settlement also closes a similar investigation in Illinois. More than 1,400 employees will no longer be subject to a noncompete at all, and nonexecutives with special skills or managerial duties will be subject to a less-restrictive version that only applies to businesses within a 15-mile radius for six months.

Noncompete agreements are governed by state law, and WeWork’s settlement brings it in line with New York’s rules, since the bulk of its employees are New York-based. But WeWork’s case is not isolated. Washington’s attorney general recently took a group of fast-food chains to task for “no-poaching” pacts that required franchises not to hire away one another’s workers. Jimmy John's imposed an especially aggressive noncompete provision on its workers until it settled a lawsuit from the Illinois attorney general. And New York’s attorney general entered into a settlement earlier this year with Law360, an online newsletter publisher that formerly extended its noncompete policy down to junior editorial employees with little or no access to proprietary information.

Businesses can expect the courts in most states to uphold noncompete agreements when they are applied properly, but not when they overreach. Evan Starr, an economist at the University of Maryland, told The Wall Street Journal that courts generally won’t enforce a noncompete if there is no legitimate business interest at stake. “The use of noncompetes is, at times, unscrupulous in that they’re applied broadly to every employee, without consideration to the knowledge or information they possess,” Starr said.

It is perfectly fair for a business to insist that a departing employee not solicit the clientele that the business has spent a lot of time and money to attract and accumulate – but only for a limited period. After the business has had a fair chance to prove to customers that they will continue to be well-served, the nonsolicitation clause has served its purpose. So the courts have insisted that noncompete provisions be limited to a reasonable duration, typically a maximum of one or two years.

Such provisions also must be reasonable in geographic scope. A clause that says a massage therapist who worked in Manhattan cannot practice anywhere in a 15-mile radius is not reasonable; that would encompass more than 10 million people in metropolitan New York City. Prohibiting that therapist from working across the street from her old place of employment would probably be OK, though, because the practitioner’s mere presence on the block could be seen as a solicitation of her former employer’s customers. The actual limits will vary depending on the type of business and whether an area is urban or rural, but generally including an entire state or region is too broad.

The fundamental idea is that you cannot take away workers’ right to make a living in their chosen occupation. The fact that a business hires an employee, provides training and offers the opportunity to gain experience doesn’t change this. Arrangements of that type were called apprenticeships, and they died out in that form over a century ago.

For a “what not to do” example, consider Jimmy John's. Before Illinois compelled the company to scrap it, the company’s noncompete agreement dictated that employees were not only barred from working at direct competitors, but any business that derived more than 10 percent of its income from selling sandwiches and that was within three miles of any Jimmy John's location, not just the location at which the former employee once worked. Which is to say if a former Connecticut sandwich-maker wants to get a new gig in Florida, he would have to check on the location of his new home state’s franchises – clearly a massive overreach.

Of course, every rule has its exceptions. A network news anchor may very well have a contract prohibiting a jump to a rival network, even one with fairly broad geographic limits – but that contract is going to come with a very generous compensation and severance package in return. In contract terms, the anchor is receiving “consideration” in exchange for giving up her right to pursue her career elsewhere. No former anchor has had to go on public assistance, as far as I know.

Companies that abuse noncompete agreements not only hurt workers, but invite legislative and law enforcement overreaction. Already, California’s draconian prohibition on noncompetes has spawned allegations of collusion among Silicon Valley companies to avoid raiding one another’s talent. And Oregon now prohibits employment agencies that hire home health aides from contractually preventing customers from hiring those aides. This may seem fair at first blush, but it turns the agencies into informal human resources departments for their customers, who can cherry-pick the best workers and undermine the agencies’ own reputation for providing first-rate caregivers. In the long run, that doesn’t serve the broader public very well. When companies use noncompete agreements unfairly and too broadly, they risk losing access to the tool altogether.

For now, though, most states are taking a sensible approach to the problem. The WeWork settlements worked out by the attorneys general in New York and Illinois, for example, seem to be well-targeted and reasonable. And in this area of labor law, reasonable is the best way to go.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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