Limits of Noncompete, No-Poaching, and No-Hire Agreements

Management and HR professionals are faced with stiff competition for talent these days. After a sometimes lengthy recruitment and onboarding process, the employment relationship normally begins on a good note. But when the company loses money because employees are lured away to other jobs, it must hire and train their replacements. Further, employees may take trade secrets or other confidential information or capitalize on relationships they’ve forged with their former employer’s prospective clients, customers, suppliers, and even other employees.

Historically, employers have sought protection from those losses by requiring employees to sign noncompete, nonsolicitation, and confidentiality agreements. But enforcement of the agreements is expensive—and difficult or even impossible in some states because local laws limit their effectiveness. Noncompetes generally aren’t favored by the courts, even when they’re enforced.

Employers in some industries have attempted to circumvent these shortcomings by negotiating formal contracts or informal agreements with other companies that they will not lure away each other’s employees. But agreements not to poach or hire employees who currently work or have worked for another company are likely illegal restraints of trade and may lead to civil and even criminal liability under federal or state antitrust laws. Congress is considering bills that would prohibit such clauses. Read on to learn how to navigate these issues.

Beware of State-Specific Limits on Noncompetes

Many employers ask new employees to sign agreements stating they will not compete with the employer either during their employment or for a specific period after they leave. These agreements usually include promises not to reveal the employer’s trade secrets or confidential information to unauthorized persons, not to solicit the employer’s customers or clients, and not to solicit other employees to leave the employer.

Employee noncompete agreements originated in the English common law and have been approved by American courts for decades if:

1. The restrictions on their duration and geographic scope are reasonable.
2. They are supported by adequate consideration (i.e., something of value is exchanged).
3. The promises are designed to protect the employer’s legitimate business interests.

But enforcement of noncompete and nonsolicitation agreements is state-specific. Some states limit or restrict their use to varying degrees. For example, noncompetes are essentially unenforceable in California unless they fall within very narrow exceptions for the sale of a business, the sale of goodwill, or the dissolution of a partnership. In Colorado, noncompete and nonsolicitation agreements are unenforceable unless they fit within narrow exceptions for the sale of a business, contracts for recovery of the expense of training an employee who has worked for less than two years, or contracts covering executive and management personnel and related staff. Other states prohibit such agreements for specific types of employees or professions, such as physicians.

Before presenting a noncompete or nonsolicitation agreement of any kind to an employee, you must ensure that it specifies the applicable state law and that you have sought competent legal counsel on any limits on such agreements in the jurisdiction. And, of course, before hiring new employees, you must ask them whether they have signed a noncompete with a current or former employer that might limit their ability to work for you. However, talking to another company with which you compete for employees should be avoided.

DOJ Is on the Move Against No-Poaching, Wage-Fixing Agreements

Agreements between companies not to recruit or hire each other’s employees are generally illegal unless they fit within very narrow exceptions. An agreement between competing employers addressing employee compensation or other terms of employment is also unlawful, and even the exchange of wage and salary data may be dubious. So-called no-poaching and wage-fixing agreements violate federal (and some state) antitrust laws.

As we’ve previously reported, the U.S. Department of Justice’s (DOJ) Antitrust Division and the Federal Trade Commission (FTC) jointly published “Antitrust Guidance for Human Resource Professionals” in October 2016 (see “Feds say HR pros can be criminally liable in antitrust cases” on pg. 6 of our December 2016 issue). The guidance makes clear that any agreement limiting hiring between employers that are competing for the same employees is a per se antitrust violation that may result in civil or criminal liability. Further, agreements that constrain an employer’s individual decision making about wages, salaries, benefits, or other terms of employment are also illegal.

In April 2018, the DOJ filed a complaint against a German manufacturer of train-related equipment, its wholly owned subsidiaries in the United States, another American company, and a French rail equipment supplier, alleging the companies had entered into no-poaching agreements to eliminate their competition for employees and instructed their outside recruiters not to solicit employees from the other companies. In July 2018, the DOJ asked the court to approve a final consent judgment barring the companies from entering into or enforcing no-poaching agreements and requiring both management and HR to notify the government if they become aware of any violations.

On May 17, 2018, a deputy assistant attorney general (AG) told attendees at an American Bar Association antitrust in healthcare conference that the DOJ’s Antitrust Division is investigating criminal antitrust violations, including no-poaching agreements restricting competition for employees in the healthcare field.

Not every agreement regarding employees is prohibited. For example, in past consent judgments, the DOJ has clarified that a reasonable agreement not to solicit or hire employees that’s part of a separate legitimate business collaboration such as a merger or joint venture may pass muster. But such agreements require due diligence and shouldn’t be considered without consulting experienced legal counsel. The stakes are high.

AGs Are up in Arms about Franchisors’ No-Poaching Provisions

No-poaching agreements between franchisors and franchisees have been prevalent for many years, particularly in the fast-food industry. Typically, such agreements involve a promise by the franchisee that it won’t hire employees who work for, or have worked for, another franchisee. Some states are fighting those agreements because they are thought to hold down wages and limit worker mobility.

In early 2018, Washington state’s AG announced an agreement with seven fast-food chains (including Arby’s, Carl’s Jr., McDonald’s, and Jimmy John’s) requiring them to drop or no longer enforce no-poaching provisions in existing franchise agreements and refrain from adding such provisions to future contracts. In July, California, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and the District of Columbia announced an investigation into the no-poaching practices of other restaurant chains that included sending a letter to the chains asking for information about their practices.

Some chains have announced they will no longer enforce no-poaching provisions. But such clauses appear in other franchise agreements, and they should be examined in light of the current climate. There’s no sign that these investigations will go away.

Tips and Pointers

At a minimum, you should take the following steps:

• Seek competent employment counsel before entering into or enforcing an employee noncompete or nonsolicitation agreement to ensure that it complies with applicable state law.
• Closely examine any agreement that restricts your ability to hire employees and independently set compensation and benefits.
• Never agree with another company that you won’t recruit or hire its current or former employees until after the situation has been reviewed by experienced legal counsel to determine if it fits one of the narrow legitimate exceptions.
• Don’t engage in meetings or discussions about wages or benefits with trade associations or your counterparts at other companies.
• All decisions about recruiting and salaries should be unilateral and independent, and not based on any agreement or understanding with a competing employer.
• Review any franchise agreements for no-poaching provisions, and consider removing or not enforcing them.
• Review your hiring practices to ensure you don’t have informal “gentlemen’s agreements” about soliciting employees or compensation with other companies.
• Become familiar with the “Antitrust Guidance for Human Resources Professionals.” It’s available at www.justice.gov/atr/file/903511/download.

Steve Massoni is an employment lawyer with Foulston Siefkin LLP. and frequently advises clients on a range of employment issues. He also contributes to the Kansas Employment Law Letter. You can reach him at  smassoni@foulston.com.