Challenges Arise Over Non-Compete Agreements

What is the future of non-compete agreements?

The debate over the use of non-compete provisions in employment contracts continues to stir as state and federal regulators push back against the inappropriate use of these provisions for low-wage workers. In New York, for example, the state Attorney General has been actively challenging the use of these restrictive covenants and recently announced settlements with three companies that will effectively end their use of non-competes. These settlements come on the heels of a report issued by the White House in May 2016 that criticized the use of non-compete agreements.

The report, based on a Labor Department study conducted in March, questions the extent to which many employees actually have access to proprietary information and the effectiveness of non-competes in preventing the misappropriation of trade secrets. In sum, the federal government has taken the position that workers are unfairly hampered from negotiating for better compensation and benefits and are often prevented from advancing in their fields by overly restrictive non-compete provisions.

What is a non-compete agreement?

Non-compete agreements are restrictive covenants that are typically included in executive-level employment agreements designed to prevent them from working with competitors after resigning or being terminated. The provisions usually include a term of 6 months or up to two years, and specify a geographic region as well. These agreements, however, are currently being used more broadly to cover lower-level employees. Proponents contend that these provisions are necessary to prevent employees from taking sensitive business information, or trade secrets, to competitors. On the other hand, some observers argue that non-competes can also stifle innovation and mobility in the labor market.

The Takeaway

Other states besides New York, particularly Illinois, Nevada, and Massachusetts have been taking a look at the use of non-compete provisions. In addition, legislation was considered by lawmakers on Capitol Hill in 2015, to no avail. Whether the Labor Department will take any action in this regard is unclear, the growing trend of action by the states in this area should give business owners pause.

That being said, there are other ways a business can protect its trade secrets, such as relying on confidentiality provisions in employment agreements. In the end, there needs to be a balance between protecting sensitive information and not impermissibly binding workers from pursuing opportunities. The best way for a business to achieve this objective is to engage the services of an experienced business law attorney.