Noncompete clauses: They’re not just for executives anymore

Introduction

Oct. 24, 2018: This story has been corrected.

This story was co-published by The Guardian.

Michael Kenny’s 13-day stint at Critical Intervention Services (CIS), a Florida private security company in Florida, was short but consequential. The employment contract he signed with CIS in January, 2017 has effectively blocked him from working as a security guard in Florida ever since — but Kenny’s contract was hardly unique. In fact, the countersuits that Kenny and CIS subsequently filed against each other illuminate a bitter argument about workers’ rights that is currently raging across the country. 

According to his lawsuit, after several days of training and orientation with CIS, Kenny, 52, was assigned his first shift patrolling an apartment complex in South St. Petersburg from 7 pm to 7 am. A veteran and single father, Kenny claims he couldn’t find child care during that time slot. When he asked for a different schedule, Kenny claims in his legal complaint that CIS told him to work his assigned shift or resign. Lawyers for CIS deny the company told Kenny to resign and even offered to find a more accommodating assignment, but Kenny quit the $11.75-an-hour job. His only paycheck was docked to repay CIS for advancing him the cost of the state-required training that the firm coordinated, as per the terms of his contract, which required repayment if he resigned within 120 days.

The story might reasonably be expected to have ended there, but it didn’t. When Kenny started working at another local security firm, monitoring closed circuit cameras at a local bank, CIS wrote to his new employer claiming that Kenny had signed a noncompete clause and thus had illegally taken valuable proprietary information and specialized training with him. The new employer soon fired Kenny.

And so the litigation began. Kenny filed a lawsuit against CIS, seeking more than $15,000 in damages and a declaratory judgement that the noncompete clause he signed was unenforceable. CIS countersued for $50,000, and the case is headed for trial next year. Lawyers for CIS claim Kenny benefited from over 60 hours of classroom and field training featuring the firm’s specialized security expertise, training and techniques — all of which  represent a legitimate business interest previously recognized by courts in other cases involving noncompete clauses. Lawyers for CIS also assert that Kenny “went to work, not only for a direct competitor, but for an existing CIS client,” and that he did not give CIS the opportunity to work with him on a possible waiver of the non-compete.

Not surprisingly, Kenny’s attorney has a different take.

“I have seen thousands of non-compete agreements and been involved in hundreds of non-compete disputes,” said Jonathan Pollard of Pollard PLLC, who is representing Kenny for free along with colleague Alexander Gil. “This is about money and greed. Companies use non-compete agreements to lock up talent, restrict employee mobility and suppress wages and corporate law firms generate hundreds of millions of dollars in revenue every year from prosecuting bogus non-compete cases.”

White collar

Traditionally, noncompete clauses like the one Kenny signed were found in contracts for white-collar executives or other high-profile employees who might have access to company trade secrets or develop personal relationships to clients. Businesses fear employees will leave and take those valuable assets with them to a competitor, so noncompete clauses help protect those companies.

But after the recession, when jobs were hard to come by and workers had less leverage to negotiate the terms of their employment, noncompete clauses started appearing in contracts for workers in low-wage or middle-income jobs like sandwich makers, and they remain a road block for everyone from hair stylists to security guards and house cleaners. The scope of their reach is difficult to determine because many workers don’t realize they’ve signed a noncompete clause until leaving a job. And though many courts are reluctant to enforce overly broad agreements, few low-income workers have the resources to legally challenge them. Several states and localities have attempted to craft legislative solutions, but fixes have been uneven or slow to take hold.

Full employment, economists predicted, would usher in a world where workers, no longer desperate for a job, could shop around for better pay or working conditions. As workers flexed their new bargaining muscle, wages would rise and working conditions would improve because employers would face increasing pressure to find and keep talent — or so the theory went.

But though unemployment fell to 3.7 percent in September, that scenario hasn’t fully played out. And one reason, recent research suggests, is that restrictive clauses in contracts have limited workers’ mobility and their ability to advocate for higher pay.

As a result, said David Seligman, an attorney and director of Towards Justice, a nonprofit legal organization that brought cases against fast food restaurants over anti-competitive hiring practices,  “the market for low-wage workers is not free.” Instead, he argues, “there’s all kinds of impediments to worker mobility and worker bargaining power.”

State regulation?

Policy makers have now started to wrestle with these restrictions. In July, Massachusetts Attorney General Maura Healey and attorneys general from 10 other states requested information from eight fast-food chains about their use of no-poaching agreements, in which franchise owners agree not to hire workers from other locations within the same franchise. The attorneys general offices are currently reviewing the responses. The attorneys general are currently reviewing the responses. Separately, Washington state Attorney General Bob Ferguson reached legally binding agreements to stop including no-poach agreements in contracts with 30 franchises since July.

The U.S. Department of Justice reached a settlement with Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation (Wabtec) in July over their use of no-poaching agreements between rail equipment suppliers. The settlement required the companies to end no-poach agreements that the department said “restricted competition for U.S. rail industry workers, which limited their access to better job opportunities, restricted their mobility, and deprived them of competitively significant information.”

Wabtec issued a statement saying the company “firmly believe(s) that our recruiting policies have been consistent with the antitrust laws and have in no way diminished competition for talent in the marketplace,” but the companies settled to avoid litigation.

Noncompete clauses that restrict workers from taking a job at a competitor immediately after leaving a job have proven more difficult to rein in. California, North Dakota and Oklahoma won’t enforce noncompete clauses, but they still show up in contracts, according to researchers like Matt Marx, an associate professor at the Boston University Questrom School of Business, potentially discouraging workers who aren’t aware of their rights.

In many other places, the situation remains murky.

Niki Cannady, 42, has worked as a health care aide since 1997 around Durham, North Carolina, and said she has only recently seen noncompete clauses in contracts for health care agencies. “I’m old school,” Cannady said, “so when I saw this and started asking other people if they’ve seen it in their contracts, I thought ‘oh my gosh, this is something new.’” Noncompete clauses have become common in the health care field, where employees often develop personal relationships with clients that employers argue could give competitors an unfair advantage when the worker changes jobs.

Cannady signed a noncompete clause in 2016 to work for health care staffing agency Allcare Home Health. Cannady had developed a strong relationship with a client that existed before her time at Allcare, so when the client planned to switch agencies in the spring of 2017, the client asked Cannady to switch as well and keep working with them in their home. Cannady remembers being told “if I go work for that client, they could sue me for $4,000.” Allcare did not respond to requests for comment.

The client wrote a letter of support to Allcare and the company eventually backed off, allowing Cannady to switch agencies. But she has been wary of agreements like this since.

In 2016, the U.S. Department of the Treasury and the White House issued complementary reports on such contracts that found approximately one in five American workers have signed a noncompete agreement.

 According to the Treasury report, noncompete clauses “can protect trade secrets, reduce labor turnover, impose costs on competing firms, and improve employer leverage in future negotiations with workers.” But the report indicated that some practices, like noncompete clauses in contracts for low-wage workers without access to trade secrets, or noncompete clauses workers aren’t aware of when signing a contract, are detrimental. “When workers are legally prevented from accepting competitors’ offers, those workers have less leverage in wage negotiations and fewer opportunities to develop their careers outside of their current firm,” the Treasury report explains.

Based on these findings, the Obama administration issued a call to action later that year, encouraging states to curb abuse of noncompete clauses by passing legislation to ban them for certain classes of workers, such as those under a wage threshold; require more transparency around their use or reform the way courts interpret overly broad contracts.

But only two states, Illinois in 2016 and Massachusetts in 2018, have taken action. Legislation has been introduced since 2017 to ban or reform noncompete clauses at the federal level and in nine states — Hawaii, Maine, Maryland, New Hampshire, New Jersey, Pennsylvania, Vermont, Washington and Massachusetts — and New York City.

Massachusetts included noncompete reform as part of an economic development package signed by Gov. Charlie Baker on August 10. The new policy bans noncompete clauses for hourly workers and establishes restrictions, including a stipulation that noncompete clauses must be presented before an employee’s first day on the job and can’t cover more than a year after employment.

Getting there took almost 10 years of work in the Massachusetts statehouse.

Initial proposals were based at least in part on a comparison between Massachusetts and California. Both have strong technology sectors, but many economists say California’s policy of not enforcing noncompete clauses contributed to the rise of Silicon Valley as the center of the technology world by allowing for a free flow of talent. Attempts at noncompete reform in the Bay State started in 2009, with proposals from Rep. Lori Erlich and Will Brownsberger, at the time a Massachusetts house rep and now a state senator, that went so far as to ban enforcement of noncompete clauses altogether.

But trade groups like the Associated Industries of Massachusetts (AIM), the International Franchise Association, and large employers like MassMutual and Verizon vigorously lobbied against more broad bans on noncompete clauses. They backed noncompete as a way to protect trade secrets and ensure companies will invest in the Massachusetts workforce.

What ultimately emerged doesn’t go as far as banning the agreements in Massachusetts, as some have called for, said Erik Winton, an attorney specializing in employment law at Jackson Lewis P.C. — but instead represents a compromise that bans noncompetes for employees that are nonexempt under the Fair Labor Standards Act, students working part time, or workers under the age of 18. The new law allows noncompete agreements for other workers as long as they are limited to 12 months after employment, reasonable in scope and necessary to protect legitimate business interests.

Legislation banning noncompete clauses for workers making under $15 an hour passed the Maryland House of Representatives in 2017 with bipartisan support, but momentum faded in the state Senate when Republican sponsor John Astle withdrew from sponsorship. The Allegis Group, a Maryland based staffing company, the Maryland Association of CPAs, Maryland Chamber of Commerce and the Maryland Association for Commercial Real Estate had previously written to lawmakers urging them not to pass a 2015 bill banning noncompetes altogether.

“Allegis Group has spent significant funds to develop proprietary and confidential information, processes and systems, which it provides to its employees so they can perform their work and be successful,” the company said in a statement, arguing that “this noncompete not only protects the company and its investment in the former employee, it protects the former employee’s co-workers who would otherwise be harmed by the former employee engaging in unfair competition.”

The Maryland Chamber of Commerce wrote that “there already exist well established standards by which courts balance the interests of employee mobility and fair competition with the interests of permitting employers to protect intellectual property and customer goodwill.”

Republican Delegate Kevin Hornberger, who co-sponsored the 2015 and 2017 measure, said he is working with Democrat Alfred Carr to introduce legislation again.

Hornberger heard from constituents who supported the effort, including a dog trainer making $25,000 a year who was unable to accept a higher paying management position due to a noncompete clause prohibiting her from working for a similar company within a 50-mile radius for 2 years.

“This isn’t a population that has access to deft legal advice,” Hornberger said. “The vast majority of these folks are working 2-3 jobs trying to survive.”

Other government bodies have introduced legislation more recently and have gotten less traction, including the New York City Council, where Democratic Councilman Rory Lancman introduced a bill last year to regulate the use of noncompete agreements for low-wage workers.

“The fast food industry is well organized and certainly has been animated over the past few years,” over the issue of noncompete and no-poaching agreements, Lancman said. His bill has yet to pass the Committee on Civil Service and Labor, but he says he isn’t giving up.

Pennsylvania state Rep. Thomas Caltagirone, D-Reading, introduced a bill to ban noncompete clauses in 2017 and plans to push the legislation again this upcoming session. But Caltagirone, Pennsylvania’s longest-serving lawmaker, has been politically wounded since it was revealed the House Democratic Caucus in 2015 paid $248,000 to settle a sexual harassment claim against him.

In Pennsylvania, industry groups like the Financial Services Institute have argued that noncompete clauses were needed to protect firms from losing financial planners with personal relationships to clients. But others in Pennsylvania see the need for legislation to protect low-wage workers from abusive noncompete clauses.

Brendan Lynch, a legal aid attorney at Community Legal Services of Philadelphia, said his office has represented workers from fast food industry, custodial services and hair salons caught in noncompete agreements they weren’t aware of them until they tried to take a new job.

“When most people think of noncompete clauses they think of … a well-compensated executive who can negotiate the terms of a deal that makes it financially fair to them to agree to restrictions on where they can work,” Lynch said. “The clients who we worked with have no bargaining power. [The contracts] are not the product of negotiations, they are the product of take it or leave it documents shoved under your nose.”

In most states noncompete agreements can be struck down or rewritten by courts if they are found unenforceable and many courts have been reluctant to enforce covenants on low-wage workers, but Lynch said most low-wage workers who find themselves in trouble with a noncompete aren’t in a position to challenge the agreement in court. “Just the threat of enforcing it is so intimidating to people,” said Lynch.

Federal scrutiny

In Washington, D.C., Democratic Sens. Elizabeth Warren, Ron Wyden and Chris Murphy introduced legislation to ban noncompete clauses in April. “Noncompetes rig the system against hard working people,” Warren said in a press release.

The International Franchise Association has reported lobbying on the legislation since its introduction. “Many franchise systems invest in methods of training and operation — and they spend considerable time and expense conveying training and operational processes to various groups of employees,” the IFA said in a June letter to Congress. If that training were to be shared and utilized outside of the franchise by a former employer, “the competitiveness of the franchise could be seriously undermined.” The letter acknowledges that noncompete and no-poaching agreements “can be used inappropriately” and offers to work with legislators to craft a compromise solution for employees and franchise owners alike, though federal legislation is seen as unlikely if Congress remains in Republican hands.

For now, noncompete clauses will likely continue to bind workers in fields like in-home health care — and worker advocates will continue to fight them. “In my experience,” said National Domestic Workers Alliance attorney and State Policy Director Rocío Avila, “those clauses … serve as a tool to intimidate and scare people off.”

Correction, Oct. 24, 2018, 10:25 a.m.: TheMassachusetts attorney general’s name has been corrected from Martha Healey to Maura Healey. Also, the Florida law firm representing Kenny has been corrected from Pollard LLC to Pollard PLLC.