Two new developments have raised the stakes in the drafting and enforcement of non-competition agreements. While there are various forms of non-competition agreements, basically they prohibit a former employee from competing against a former employer for a period of time, such as two years. An alternative is to prohibit the former employee from soliciting the former employer’s customers for such a period of time. According to a fact sheet distributed by the White House, non-compete agreements apply to an estimated 20% of workers in the U.S.
The Obama Administration had called on Congress to pass federal legislation eliminating non-competes for workers who fall below a specified salary. Currently the law of non-competes is based almost entirely on state law, which varies considerably from state to state. Some states, such as California, ban non-compete agreements almost completely, but a majority of states enforce non-compete agreements that are reasonable in terms of time, territory and activities prohibited.
As part of the Obama Administration’s interest in non-competes, the Department of Justice and the Federal Trade Commission in October, 2016, issued guidance to help human resource professionals deter collusion among competing employers who agree to use non-compete agreements to suppress wages. These agencies have issued so-called "best practices" as suggestions for human resource departments. In a news release issued on October 20, 2016, the Justice Department announced that it would criminally investigate no-poaching or wage fixing agreements among employers. Such agreements to cap employee pay or avoid recruiting another’s employees could be considered a criminal anti-trust violation, according to the announcements. While the Justice Department has never criminally prosecuted an HR anti-trust violation, it has brought some civil cases, particularly involving several California technology companies that allegedly agreed not to call each other’s employees with job offers. The guidance acknowledges that there may be exceptions for such prohibitions in connection with a legitimate merger or acquisition proposal.
In a related development, the National Labor Relations Board (NLRB) has recently ruled that an employer commits an unfair labor practice by requiring new employees to sign non-competition agreements without prior bargaining with the union. Minteq International, Inc., 364 NLRB No. 63 (7/29/16). The Board ruled that employee work rules are mandatory subjects of bargaining, and that the employer’s non-compete agreement, which prohibited an employee from competing during employment and for 18 months afterward, represented precisely the type matters in which collective bargaining is required. The Board rejected the employer’s argument that nothing in the agreement indicated that an employee would be disciplined during employment under the non-compete agreement. The Board further found that an "interference with relationships" provision in the non-compete agreement was unlawful. This provision required employees for 18 months after their employment to refrain from soliciting or encouraging any present or future customer or supplier of the company to terminate or otherwise alter the relationship with the company in an adverse manner. The Board concluded that this "interference" provision would impair the ability to engage in communications, such as asking customers to boycott the company’s services or products.
Editor’s Note: The Minteq case and others represent a growing trend of using seemingly unrelated laws to attack agreements reached between employers and employees. An employee might defend an employer’s effort to enforce a non-compete agreement by arguing that the agreement was never negotiated with the union. There are a number of cases currently pending before the U.S. Supreme Court dealing with the issue of whether individual employment agreements requiring employees to bring all legal claims in arbitration rather than in court, and waiving class or collective actions, are invalid because they adversely affect the rights of employees to engage in concerted activities under the Labor Act.