So You’re Asked to Sign a Non-Compete….

It’s your first day at your new job. A job you think you will love. As you are working your way through the employer’s paperwork, you are presented with a non-compete. Lengthy and full of long words, you sign the non-compete.

Nine months later, a better job opportunity arises. You apply, and get the job! You give your current employer notice, and move on to the new job with no hiccups. One month later, your prior employer files a lawsuit against you for violating the non-compete you signed at your last job.  You think to yourself, “but I was just a low-level employee there. Why are they suing me? I don’t know anything!”

Non-compete clauses are increasingly prevalent in the workforce. In the past, non-compete agreements were used for management and officer positions, those employees who posed a threat to a business if they worked elsewhere due to the knowledge and insights they learned at their prior employer. Over the past decades, non-competes have been working their way down the employee ladder, now covering even entry-level employees.

Courts have struggled with non-compete agreements. California, for example, bans non-competes entirely. Other states, like Michigan, place limitations on non-competes. The Obama White House proposed a ban on non-competes, with their chief economic advisor arguing that “If you have less of an ability to threaten to leave one job for a better job then you have less of an ability to earn,” a refrain echoed by many economists and attorneys: non-competes reduce leverage, and in turn, wages and employment.

The Infamous Jimmy Johns Non-compete

Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after … he or she will not have any direct or indirect interest in or perform services for … any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located with three (3) miles of either [the Jimmy John’s location in question] or any such other Jimmy John’s Sandwich Shop.

Jimmy Johns’ non-compete is notorious for essentially limiting an employee’s ability work for any sandwich business. This non-compete is applied even to delivery drivers, who are unlikely to have any inside knowledge about Jimmy John’s that they might reveal to a competitor. Lawsuits have been filed against the legality of this provision, and Jimmy John’s has suffered public backlash against this non-compete, since it tends to hit low wage employee- those with the least ability to find work- that hardest. Non-competes such as this a likely to face additional lawsuits- and judicial and legislative scrutiny- as time goes on.

The Argument For and Against Non-competes

Non-competes serve a valid purpose. Businesses clearly want to protect their trade secrets, customer lists, processes, and similar operations. A business clearly is disadvantaged if an employee can go to a competitor, promise to reveal damaging secrets in exchange for a job and a raise, and then have the employee jump ship.

Non-competes, though, are coming under increasing scrutiny. Legislatures have limited their application, such as by limiting their duration or limiting their geographic scope. Courts are turning against them, finding them unconscionable or illegal. Free market economists have argued that non-competes are a restriction on the free market ability of employees to work and employers to hire. Regulatory economics have argued that non-competes restrict the ability of employees to leave their current job for something better.

If you are an employer considering a non-compete, state restrictions are the first consideration. Michigan, along with many other states, place restrictions upon non-competes. The second consideration an employer must make is whether a non-compete hinders their ability to hire- will a potential employee walk away when faced with a restrictive non-compete?

An employee must understand what restrictions are placed upon them by a non-compete. Whom can they work for if they leave their current employer? Is there a time duration when they must not work for a competitor? What businesses qualify as a competitor? These are just some of the questions an employee must consider before signing a non-compete.

If you are an employer considering a non-compete or already have one in place that needs review, or an employee facing a non-compete, having an attorney review the non-compete is critical. To have a review of a non-compete, please contact Benjamin Long of Schmidt & Long.