When an employee leaves one company to work for a competitor, he may take customers and confidential information with him, thus harming the original employer.
To protect their interests, employers can have certain employees sign a noncompete agreement, barring them from working for a competitor for a certain amount of time after their departure. But some employers are using noncompetes indiscriminately – forcing even minimum-wage workers to sign them – and the courts and attorney general’s offices are cracking down.
“Traditionally, noncompetes were effective tools for employers to protect legitimate interests like trade secrets – such as a recipe, algorithm or software design – and customer lists,” said Lois Carter Schlissel, managing attorney and head of the employment law practice at Meyer, Suozzi, English & Klein in Garden City. Over the last five to 10 years, however, “some employers have been using them across the board, even with low-level workers.” Because noncompete agreements can create undue hardships for workers, making it difficult for them to get another job, they are being struck down in cases where they are too broad.
This summer, New York Attorney General Eric Schneiderman announced settlements with Law360 and Jimmy John’s Gourmet Sandwiches regarding overreaching noncompete agreements.
Law360, a Manhattan-based news resource for the legal industry, required its editorial employees to sign agreements barring them from joining any direct competitor in the legal news and data sector for a year after leaving the company. In the settlement, the publishing company, which is owned by LexisNexis Legal & Professional, agreed to mostly discontinue the mandatory agreements after an investigation found they were too broad. Law360 will maintain noncompetes for only the top three editorial executive positions (and it is free to require senior non-editorial employees to sign such agreements).
“Unless an individual has highly unique skills or access to trade secrets, noncompete clauses have no place in a worker’s employment contract,” Schneiderman said in announcing the settlement. “Workers like the reporters at Law360 should be able to change jobs and advance their careers without fear of being sued by their prior employer.”
Jimmy John’s, an Illinois-based sandwich shop with franchises in New York, agreed to stop including noncompete agreements in hiring packages it sends to its franchisees after Schneiderman’s office concluded the agreements were unlawful. They prohibited sandwich makers, for a period of two years after leaving a job with Jimmy John’s, from working at any establishment within a two-mile radius of a Jimmy John’s location that made more than 10 percent of its revenue from sandwiches.
“Noncompete agreements for low-wage workers are unconscionable,” Schneiderman said in a statement. “They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued. Companies should stop using these agreements for minimum wage employees.”
Schlissel said, “Schneiderman and his office will continue to focus on this issue. They are actively targeting employers that require all employees, even those in low-level positions, to sign noncompetes.”
Anti-noncompete agreement sentiment goes beyond the borders of New York State. In a March 2016 report, the U.S. Treasury Department found they harm worker welfare, job mobility, business dynamics and economic growth. Two months later, the White House concluded they depress wages and inhibit innovation.
In New York, noncompetes are generally disfavored by the courts, except in cases where employees are privy to confidential or trade secret information or if they served in a unique role, said Russell Penzer, a partner at Lazer, Aptheker, Rosella & Yedid in Melville.
“We talk to clients about whether a noncompete is appropriate for a particular employee,” Penzer said. “If it’s appropriate, the agreement has to be reasonable both in geographic scope and length of time.”
What courts deem a reasonable amount of time depends on the case.
“In a number of cases, the courts have held that six months is a reasonable amount of time, but it’s highly fact-sensitive,” Schlissel said. “There have been instances where a year or two years have been approved, but this has to be supported by facts that show the extended period of time is needed to protect legitimate interests.”
Geographic scope varies widely depending on how the company does business and where its customers are. “Sometimes your geographic area is the whole world,” Schlissel said. “On the other hand, the corner bakery doesn’t require the whole world.”
Courts will only enforce agreements that protect legitimate interests of the employer.
“A prototypical reasonable interest is if the former employee has possession of a client list that has been generated over time and is not available to the public,” Penzer said. “If the client list is not proprietary – if it’s available to the public – it won’t be enforced.”
Short of a noncompete, an employer can have a nonsolitication agreement, preventing a former employee from soliciting the original employer’s clients or employees.
“You don’t want to handicap people and prevent them from working,” Penzer said.
In some cases, a salesperson brought customers to the employer when he came. “If this salesperson signs a noncompete and then leaves and challenges the noncompete, saying it’s fair to keep the clients he brought into the relationship, he would have a pretty good argument,” said Jonathan Trafimow, partner and chair of the employment law practice group at Moritt Hock & Hamroff in Garden City.
Laws that govern noncompetes are state-specific.
“One of the biggest issues to consider when dealing with or drafting noncompetes is which state’s laws are going to apply,” Trafimow said. “State laws range tremendously in the degree to which noncompetes will be enforced.”
A noncompete agreement is a bit of a misnomer, Schlissel said.
“It should be labeled a business protection agreement, because that’s the legitimate purpose,” she said.
Once an employer has drafted a strong, enforceable agreement, it should be presented to the applicant – something the courts are scrutinizing more and more, Schlissel said.
“The applicant should be informed of why it’s necessary for him to sign the agreement and given the opportunity to ask questions and review it with an attorney if he chooses,” she said. “This gives the employer the ability to demonstrate to the court it took steps to make sure the employee understood the agreement.”