The use of non-compete or restrictive covenant clauses is common in the ground transportation and other industries. Typically contained within a more comprehensive employment or similar agreement, these clauses operate to inter alia prohibit an employee from utilizing information obtained during the course of his/her employment or from otherwise competing against his/her former employer. Some also prohibit the employee from working for competitors for a certain period of time and/or within a certain geographic area.
Current laws regulating non-compete agreements vary from state to state. A number of states prohibit their use entirely except in very limited circumstances, while others prohibit their use with low-level workers. Some states limit the use of non-competes to individuals who earn above a specified income threshold. Others require that the employee receive “consideration,” or something of value in exchange for the covenant.
State laws aside, as a general matter non-compete agreements are only enforceable where they are designed to protect the legitimate business interests of the former employer and go no further than is reasonably necessary to protect those interests. Courts as a general matter do not enforce covenants that unduly restrict an ordinary employee’s ability to make a living (e.g. a covenant prohibiting a dispatcher from working as a dispatcher), covenants that are temporally overbroad (e.g. a clause prohibiting a reservationist from working in that capacity for a 10-year period), and covenants that are geographically overbroad (e.g. one prohibiting an employee from working within 500 miles of the employer’s premises).
Highly compensated executives are another story. A Coca-Cola executive with access to the company’s secret formula would likely be bound by a restrictive covenant agreement that forever prohibits him from working for a competitor. In contrast, the beverage giant would face an uphill battle enforcing the same covenants against a truck driver who delivers cases of Coca-Cola to grocery stores. Even where reasonably drafted, restrictive covenants are in practice hard to enforce, especially against low-level employees.
Nevertheless, employers routinely have low-level employees enter into non-compete agreements at the time of hire. Employees oftentimes do not read what they are agreeing to, only learning of the restrictions when they give notice that they’re leaving the company. There was a case a few years back involving Jimmy John’s, a national chain of sandwich shops that had its minimum wage workers sign covenants stating that for a period of two years after leaving Jimmy John’s, they could not work at any other establishment within a two-mile radius of any Jimmy John’s location that made more than 10% of its revenue from sandwiches.
In other words, these unsophisticated low-wage employees were agreeing that for a period of two years they would not apply to work at Subway, McDonald’s, Burger King, a delicatessen, or just about any other restaurant that sells sandwiches. The practice ceased after the attorneys general of New York and Illinois brought suit, but this extreme example illustrates the potential misuse of non-compete agreements.
In an effort to address the misuse of non-compete agreements on a nationwide level, and other practices viewed as impediments to workers obtaining higher wages and better benefits, on July 9, 2021, President Biden issued an executive order that – among other things – seeks to ban or limit the use of non-compete agreements and directs the Federal Trade Commission (FTC) to promulgate rules that would achieve that objective. According to a White House press release, the proposed rules will “[m]ake it easier to change jobs and help raise wages by banning or limiting non-compete agreements… that impede economic mobility.”
Employers and trade groups are understandably quite concerned about this development, particularly given the broad nature of the President’s marching orders. While the FTC could conceivably promulgate an outright ban on non-competes, more likely than not it will seek to impose restrictions on their use. This may occur months or even years from now, and regardless of what the FTC comes up with there will likely be legal challenges to the proposed rules that will further delay their implementation. My guess is that we will see some sort of middle ground reached, with a “red light” approach completely prohibiting the use of indiscriminate non-compete agreements with low skilled and low paid employees, a “green light” approach when it comes to highly compensated executives and/or individuals who had access to highly sensitive information (like the Coca-Cola executive mentioned above), and a “yellow light” approach to everyone else.
For now, unless you know you’re dealing with one extreme or another, I recommend that you proceed as if there’s an imaginary yellow light and do so with caution. Even in liberal jurisdictions that presently don’t regulate non-compete agreements, the days of mechanically throwing an overbroad document at employees and demanding that they sign will likely soon be behind us. Whenever a non-compete is used, it should be tailored to the type of employee being asked to sign it, and the type of information that employee may gain access to during the course of his or her employment.