A non-compete agreement is a contract that an employee signs with an employer that states that the employee will not compete with the employer when he or she leaves the business for a given period within a specific geographic area. Though these agreements originally were meant for high-ranking executives and managers, they have been used increasingly with low-wage, hourly employees.
An employer could have valid reasons to ask some employees to sign such agreements, normally as part of an employment contract. If the employee is highly skilled, difficult to replace, and possesses critical intellectual property that a competitor could use, it would make sense for the employer to consider using such an agreement. But if the employee is paid by the hour, doesn’t use specialized skills, is relatively easy to replace, and lacks access to privileged information, such an agreement appears to be useful only as a way for the employer to benefit itself in one or more of the following ways:
- exploit its bargaining power over the employee,
- make it more difficult for the employee to leave,
- reduce employee turnover, and
- decrease the pressure on the employer to improve wages and benefits to keep staff.
Employers Are Coming Under Scrutiny for Using Non-Compete Agreements
Especially in service industries, employers typically invest in and train their employees. To protect that investment, they may use these agreements to discourage employees from leaving, protecting their investment, and limiting the options for employees to seek another job.
One of the most famous, or infamous, instances of the use of non-compete agreements by an employer with low-wage workers involves the sandwich chain Jimmy John’s. The New York Office of the Attorney General started investigating the use of these agreements by Jimmy John’s and its New York franchises in 2014. The issue was whether this type of agreement, which prevents departing employees from working for any company that earned more than 10% of its revenue from sandwiches within two miles of any Jimmy John’s store, was legal under state law.
The Attorney General concluded that it wasn’t: the non-compete agreement was considered unlawful and void. Jimmy John’s settled with the Attorney General in May. It agreed to stop using non-compete agreements in New York and to void any past agreements signed by employees in the state. New York law only allows non-compete agreements in very limited situations, such as to prevent trade secrets from being disclosed or for employees with uniquely specialized skills (which apparently doesn’t include making sandwiches).
In June, the Illinois Attorney General sued the restaurant chain on similar grounds. Jimmy John’s responded by stating that it stopped using the agreements in 2015, according to Fox News.
Online retailing giant Amazon has required its U.S. employees, including hourly workers up until 2015, to sign non-compete contracts covering more than 18 months after they separate from the company. According to Business Insider, the contract stated that, to be hired, workers agreed to not
[E]ngage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future) that employee worked on or supported, or about which employee obtained or received confidential information…
Is Your Non-Compete Agreement Legal? Maybe!
State law regulates non-compete agreements. They are generally deemed legal, depending on their wording, nationwide, including in Maryland, Virginia, and the District of Columbia. Whether a non-compete agreement is valid usually depends on its language, the circumstances under which the agreement was signed, and the applicable laws, which vary from state to state.
Typically, these are form contracts that the employee has no ability to change. If the agreement is brought to court, the burden would be on the party who wrote it (the employer) to prove that it is valid and enforceable. If an employee challenges a non-compete agreement in court, there are many issues that could come up depending on the facts of the case and the applicable laws. These include the following:
- Was the contract properly executed?
- Is the agreement reasonable?
- Are the restrictions no greater than necessary to protect the employer’s legitimate interests?
- Is the employee subjected to undue hardship under the agreement?
- Do the restrictions injure the public?
- Are there geographic or time limits? If so, how far and for how long?
- Does the employee have access to confidential information or trade secrets?
- Does the non-compete agreement restrain ordinary (not unfair) competition?
- Does the agreement stifle skills that the employee had prior to taking the job, or were the skills at issue developed while working for the employer?
- How does the agreement work to the detriment of the parties?
- Does the agreement restrict the employee’s only means of support?
- Did the employer breach some other part of the overall agreement or contract with the employee?
- Was the employee induced to sign by the employer making false promises that it didn’t live up to?
The non-compete agreement could be found void if a court determines as follows:
- The agreement is not reasonable because it’s too broad and the employee is exposed to undue hardship.
- The length of time is too long and the distance it covers is too far.
- The agreement restrains normal competition, the skills were obtained prior to the job starting, and the worker’s only means of support is being restricted.
- The harm to the employee of enforcing the agreement is much greater than the harm to the employer if it’s not enforced.
If an employee is not highly paid, doesn’t have unique skills, or doesn’t possess trade secrets or intellectual property that a competitor could use, those factors would weigh in favor of the employee.
Summing It Up
The highest value that these non-compete agreements for low-paid employees give companies is not so much the legal obligations that they create but that they scare employees into not violating them.
- As a practical matter, a restaurant would probably have a hard time establishing damages (the harm done) caused by a violation of a non-compete agreement with a short-order cook working for a different restaurant across town. Establishing damages is a critical part of a contract claim.
- If there are no damages, or if damages can’t be reliably calculated, the employer could ask a court to enforce the contract and order the cook to leave his new job, either out of spite or to send a message to its employees to stay where they are. Depending on the language of the agreement, the cook might also be liable for costs and legal fees that the employer incurs to enforce the agreement.
- The cost of the lawsuit may not justify the benefit concerning that particular cook, but other employees may not leave to look for new jobs because they fear being sued.
If you’re presented with a non-compete agreement, contact us before you sign it. We can explain the terms of the agreement and advise you of your options so that you can make an informed decision as to whether to agree to it. And, no matter how well or poorly you’re paid, if you have questions about an existing non-compete agreement, please contact our office so we can discuss your situation, how the law may apply, and what options you have moving forward.