Noncompete agreements, once exclusively for highly paid execs, are now being used with even blue collar workers. Are they useful? Are they legal? How do you keep them that way? Here’s the information you need.
It seemed a simple enough transaction. The sports broadcasting network, ESPN, had decided to change security service vendors. One company was out, the other in.
The outgoing firm, of course, no longer needed a staff of 40 at ESPN headquarters. But they were good workers who knew the job, so the replacement organization decided to hire them. That’s when things blew up. The first firm, you see, had a noncompete agreement with the guards. They couldn’t work for a replacement, even though they’d been fired by their original employer. Both companies headed to court.
What’s going on here? Noncompete agreements with rank and file security guards? Aren’t such legalities more a tool for dealing with the top people in the organization?
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Not anymore, it turns out. They’re now being used in lower-paying and even blue collar jobs. “A lot of employers are jumping on the noncompetition bandwagon,” says attorney Mitchell Baker, of the Portland, Oregon, law firm of Fisher & Phillips, “and taking them into professions never used in before.” Baker says he’s even defended welders and mechanics in noncompete cases.
The statistics back him up. Cases involving noncompetes have risen 81 percent in a decade, reports the Shephard Law Group in Boston, and that doesn’t count cases settled outside of court. And a 2005 SHRM study showed half the companies surveyed now use them. Why the jump?
Backers of the agreements say the documents have valid purposes, protecting trade secrets and hard-won customer lists. But others say they’re now being used to quell rivals in an increasingly competitive economy by depriving them of skilled worker, a position at odds with longstanding public policy, which tries to preserve a free market.
The use of such agreements is tightly controlled by state law. And the law differs from state to state. Some states, such as California, essentially ban noncompetes. Others enforce them almost without a thought. Others fall midway between. The key element in whether an agreement will stand up in court is often reasonability, based on these parameters:
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–Time. How long will a former employee be denied the right to again work in the same profession? “The company must be able to explain why it needs this particular time,” says Dallas attorney Bill Davis, as reported on SHRM.org. “It should say that’s how long it takes to develop new customers or that’s our product shelf life.”
–Geography. In what territories will a former employee be restricted? Employers should define this parameter as tightly as possible. If a firm does business in only one county or state, it should not ask for wider protection.
–Activities. What specific work will the former employee not be allowed to perform for others? If the job is sales, the restriction should not be made on the basis of industry or type of business. Speaking about Georgia law, Atlanta attorney Greg Hare says “an agreement prohibiting employment by a competitor ‘in any capacity’ is unlikely to be enforced.”
If the concern is stealing customers, employers should also look at the possibility of substituting another kind of agreement for the noncompete.: The non-solicitation agreement, for example, is more likely to meet court approval and it enjoins the worker from going after customers of a former employer for a set period of time. Even here, the restriction should be narrow. “Such an agreement is more likely to be enforced,” says Hare, “if it focuses on the customers with whom the particular employer did business, rather than on all the company’s customers.”
If you’re interested in noncompetes, remember to check your state’s law on the subject. Our state-specific website, HR.BLR.com, or your state’s edition of What to Do About Personnel Problems in [Your State] are the places to start your research.
“Hidden Info!”
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