It seems that the use, or more specifically, the over use and abuse of employee non-compete agreements is now in the crosshairs of several state legislatures and the federal government.
Over the past few years some states have enacted statutes limiting such agreements and banning them outright in some industries. In March 2016, the United States Treasury Department issued a study on the abuse of non-compete agreements and their negative consequences in the United States labor economy. Last week, the White House issued a similar document on the topic that announced the President intends to “facilitate discussion on non-compete agreements and their consequences.” The White House document acknowledges that state law largely governs the validity and enforcement of worker non-compete agreements. The report nonetheless states that its goal is to identify a specific set of best practices for state legislators to consider when enacting reforms to address the misuse of non-compete agreements.
The White House report contains a number of fairly startling statistics which leads the report writers to conclude that non-compete agreements often result in less job mobility, reduced earnings, loss of worker bargaining power, and restraint on entrepreneurship. According to the report, nearly 20% of all U.S. employees are currently working under the terms of a non-compete agreement. This includes almost 15% of workers earning less than $40,000. The report identifies a number of negative side effects of the overuse of non-compete agreements. These include:
- Many employees who do not possess trade secrets or confidential business information are nonetheless forced to sign non-compete agreements. This is true even for significantly lower wage workers.
- Many employees who are required to sign a non-compete agreement often become aware of that requirement only after accepting the job offer and after declining other employment offers. This places them in a “no choice” bargaining position.
- Many employees asked to sign non-compete agreements simply do not understand the implications of the agreement and how it may be enforced to deprive them of future job opportunities.
- Some employers write non-compete agreements that are clearly overbroad and unenforceable under state law, since there may be no legal disincentive for doing so.
- Most states do not require an employer to provide financial “consideration” as a condition to requiring an employee to sign a non-compete agreement. “Consideration” refers to some additional value or benefit, such as a promotion, pay raise, or bonus.
- In many states, including Tennessee, non-compete agreements can prevent employees from accepting new employment even though he or she was fired without cause (i.e. not due to some misconduct or insubordination). This creates a situation where the employer sees no value in retaining the employee, but nonetheless prevents him from obtaining a comparable job and wages unless he is willing to move to another community outside the prohibited area of competition.
- Non-compete agreements can have a negative impact on consumer health and wellbeing by restricting consumer choice. This is particularly true in the medical field.
It is not too difficult to find evidence of some of these abusive practices by Tennessee employers. Within the last week I was told by a 23-year-old receptionist with a high school education that her employer required her to sign a non-compete agreement. As these detrimental consequences of non-compete agreements continue to be discussed in public forums, some local change is inevitable. Even if there is no legislative reform in Tennessee, employers at some point should expect judges who regularly hear disputes regarding non-compete agreements to be more informed of these negative impacts and therefore less likely to enforce more questionable agreements.
I have always recommended to Tennessee employers that their policies for non-compete agreements be regularly reviewed for the purposes of (1) identifying only those higher level employees from whom a non-compete should be obtained, and (2) evaluating the nature of restrictions contained in those agreements to ensure they are not likely to be regarded as overbroad and potentially unenforceable. If you are an employer making use of non-compete agreements, you should make this type of review a high priority in the very near future.
If you would like to speak to John Lawhorn on this or any other matter, he may be reached at (865) 546-9321.