While non-compete agreements do have their purpose, they are over used and abused by employers. As a general proposition, they are disfavored in most states as a restraint upon trade. Most recently, a non-compete agreement that Jimmy Johns’ Sandwich shop has used with even its low wage workers has caused a stir in the employment law world. The agreement prohibits sandwich stuffers from taking a job with any business that makes deli-style sandwiches for a period of two years within three miles of any Jimmy Johns sandwich shop. Of course Jimmy Johns is now so prevalent, that this would bar the employee from stuffing sandwiches in most populated areas in the country.
Some will say that a contract is a contract, but that is not so with non-compete agreements. Non-compete agreements represent a restraint upon trade which is against the public interest and interferes with peoples’ ability to find gainful employment and support themselves. To be enforceable, non-compete agreements must be very narrowly drafted so that they put the least burden on the employee and are carefully directed at an important interest of the company.
The classic example of an important interest of a company is the small business hair salon. The salon invests money advertising in the yellow pages (and now internet) and walk-in clients meet a hair stylist with whom they develop a loyalty. If the hair stylist leaves and opens up shop across the street, the salon stands to lose money on its advertising investment. In this circumstance a non-compete may be appropriate. Still, it must be very narrowly written. A non-compete which prohibits the hair stylist from working at any salon in the country for 10 years is clearly excessive and is not designed to protect any interest of the employer – after all, how many clients will the salon in Dallas lose if the stylist takes a job in Seattle? And how many of the stylists clients will wait even six months to seek a new stylist with whom they will build relationships? How many advertising dollars will the Dallas hair salon have wasted on advertising in Seattle? Meanwhile, the hairstylist is going to have to find a new line of work – he cannot simply wait 10 years for another job. In short, to be valid the non-compete agreement in that case should probably be narrowed to a geographic area within 3-5 miles of the salon (depending on the local population) and only be valid for six months or less from the time the hair stylist leaves the salon.
Part of the outrage over the Jimmy Johns non-compete agreement is that it attaches to low wage sandwich stuffers. What possible interest does Jimmy Johns have in preventing that sandwich stuffer from taking a job at a Subway shop even as little as three miles away? Is the Jimmy Johns going to lose customers who are loyal to a particular sandwich stuffer and who will travel an extra three miles to stick with him? What if the sandwich stuffer moves from Dallas to Seattle? Will the local Dallas customer travel to Seattle for a sandwich? Probably not.
Non-compete agreements are more likely enforceable in high wage jobs where employees have confidential information and relationships that relate to large amounts of money. For example, a person who sells specialized software to telephone companies has likely built a relationship with customers over time that could cost his employer millions of dollars if he leaves and goes to another company. The salesman not only has the relationship with the customers, but he knows the particulars of the software company’s product and the needs of the customers. He would provide a competitor with an unfair advantage. The software designer might create an even greater danger to the company’s business.
Even those kinds of non-competes are often over used and excessive however. It is important to consider each non-compete and each company on a case by case basis. The company’s interest also has to be weighed against the employee’s interest. For example, if the employee is a medical doctor who has not practiced medicine in 20 years, but has developed an understanding of the needs of hospitals, his skills set may not be useful in other areas. What kind of work will he find? A non-compete that is for a very short period of time and applies only customers of the company may be appropriate. But anything beyond that may gratuitously put the employee out of work.
So why do companies abuse non-compete agreements? They are not generally afraid of losing a case in court. Most court cases involving non-compete agreements are filed by the company against the offending former employee. If the employee violates an invalid non-compete agreement, the company will simply not bother to file the law suit. But the non-compete agreement can act as a de facto restraining order either because the employee will be afraid to violate it, or because the new company will be afraid of a lawsuit for interfering with the non-compete agreement. This has the effect of inhibiting the employee from finding new or better work, or even finding work after he has been terminated. It can be disaster for the former employee. This creates a huge stick to prevent employees from quitting their jobs even where the company is underpaying, requiring excessive working hours, or other kinds of abuses. And of course, it also provides the company with a means of protecting business that a court might otherwise find to be too small a loss in comparison to the employee’s loss of gainful employment.
Non-compete agreements are often signed as a matter of course when an employee takes a new job. The Jimmy Johns non-compete is a prime example. Jimmy Johns is not separately negotiating thousands of non-compete agreements with sandwich stuffers. They are form letters and the sandwich stuffer has no say in what the rules are.
Many non-competes even include a statement whereby the employee agrees that the non-compete will not interfere with his future employment prospects. How does the employee know this five, ten, or 15 years down the road? Does the employee know what he will be doing for the company at that point? Does he know what the state of the economy will be at that point? Such crystal ball gazing is preposterous.
Still, there are narrowly written non-compete agreement that protects a legitimate interest of the company without gratuitously putting an employee on the list of unemployed. Those agreements are likely to be enforced by a court.
If you are looking for work and are stuck with a non-compete agreement, or are a company in need of enforcing a non-compete agreement, or having one drafted, you need to speak to an employment lawyer.