Employers have long relied on non-compete agreements to keep highly skilled and highly paid workers from jumping to competitors and stealing trade secrets.
But such agreements are spreading into the broader workplace, even among low-wage workers, new research shows. That's sparking debate whether the contracts hurt employees by limiting limiting their freedom to get a new job and stunting wage growth or whether they offer vital protections businesses increasingly need in a service-based economy.
"Non-competes are being used systematically, even for workers who have no access to trade secrets or less than a college education," said Evan Starr, an assistant professor at the University of Maryland's Robert H. Smith School of Business, Management and Organization who has done extensive research on the topic.
Several states, including Maryland, Maine and Massachusetts, have considered legislation to limit the use of non-compete agreements, particularly for low-wage workers. The Maryland bill, sponsored by Del. Alfred C. Carr Jr., a Montgomery County Democrat, narrowly passed in the House but didn't move in the Senate Finance Committee. Opposed by business groups, it would have banned non-competes for workers earning less than $15 an hour.
With entry-level workers, Carr said, "it's pretty clear that there's not some sort of secrets they're walking away with, but it's more of an unfair tactic of control by the employers that really limits the freedom of workers."
Many companies have found the need to require non-competes as the economy has shifted from goods-based to service-based, advocates argue, especially as companies with valuable client relationships have lost business when employees leave and take clients with them.
Technology has made it easier to steal confidential information that might be stored on the cloud or on a flash drive, said David Kleinmann, a partner in Tarter Krinsky & Drogin's labor and employment practice in New York, who has represented both employers and workers.
Some companies use the arrangements as a tool to reduce turnover.
"There's no doubt that certain businesses are getting more aggressive in terms of who they are asking to sign non-competes," said Eric N. Athey, co-chair of the labor and employment group for McNees Wallace & Nurick LLC, a law firm with offices in Pennsylvania, Ohio, Frederick and Washington, D.C. On the flip side, Athey said, he's seen companies become more willing to negotiate with new hires as the economy has improved and businesses are competing for talent or to offer special benefits or other incentives to employees who agree to a non-compete.
The arrangements typically prohibit employees from leaving to join or start businesses that would compete with their employer for a certain amount of time.
Well over a third of employees surveyed by Starr in 2014 had signed a non-compete at some point in their careers, while more than 18 percent of workers — roughly 30 million people — were bound by one. He is updating the survey with researchers from the University of Michigan's business and law schools, which worked with him on the original.
According to the 2014 survey, 39 percent of employees bound by such agreements had at least a bachelor's degree and earned more than $100,000, but 12 percent had no college degree and earned less than $40,000 a year. People earning between $20,000 and $40,000 have a 15 percent chance of working under a non-compete, the study found. About a third of non-competes were signed after the worker accepted the job, and few employees negotiated the agreements, choosing instead to sign them without seeking legal or other advice.
The broader use of non-competes is raising questions about how best to write and apply such contracts. Athey said he has seen restaurants ask assistant managers to sign contracts and is currently handling a case in which a construction company wants to require it for a draftsman who has no contact with clients.
"Traditionally courts would only enforce these if you were talking about someone at the executive level or someone involved in sales or some other high customer interaction… or someone involved with trade secrets," he said. "Most state courts are going to look at whether there is a legitimate business interest being protected by the agreement… If it only hurts the individual without protecting the legitimate interests of the business, most courts won't enforce."
A few cases of low-wage workers challenging non-competes have grabbed headlines over the past few years, including a Jimmy John's Gourmet Sandwiches employment contract that applied to low-wage sandwich makers and delivery drivers and a non-compete clause in contracts for Amazon warehouse workers, which prevented them from moving to competing companies for 18 months. After Amazon's practice was publicized in 2015, the online retailer reportedly removed that clause.
Last month, New York's attorney general reached a settlement with Jimmy John's in which the sandwich shop franchiser agreed to stop including sample non-compete agreements in hiring packets it sends to franchisees. Under the agreement, sandwich makers who left Jimmy John's could not work for two years at any business within two miles of any Jimmy John's that made more than 10 percent of its sales from sandwiches.
"Non-compete agreements for low-wage workers are unconscionable," New York Attorney General Eric T. Schneiderman said in announcing the settlement. "They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued."
In an email last week, a Jimmy John's spokesman said locations in Maryland are owned and operated by independent franchisees, who are responsible for establishing policies for their own employees.
"The company does not use non-compete agreements in its corporate-owned stores, nor does it require or encourage franchisees to use them," the spokesman said.
A case involving a non-compete agreement pending in U.S. District Court in Baltimore involves an executive who left one company, allegedly taking some business information, and is starting a competitor.
Baltimore-based jewelry retailer Albert S. Smyth Co. is seeking damages from a business stared by Smyth's former chief operating officer, accusing the former executive and other employees of stealing confidential lists of customers, vendors and employees to start a Meritage Fine Jewelers. According to the lawsuit, the employees took control of an online company Dropbox account with files of customers, employees' salaries, Smyth business plans, vendor pricing and purchase plans.
The former COO, Mark A. Motes, is accused of breach of contract for allegedly violating a non-compete agreement in his employment contract that prohibited him from soliciting customers or employees or opening a competing business in the state for two years after leaving the company. In a response Motes filed in court, he said the lawsuit is Smyth's attempt to prevent him from "lawfully creating a retail jewelry business that may take away some of [Smyth's] dwindling market share in an already crowded jewelry market."
The enforcement of non-compete agreements varies from state to state. A few states, including California, North Dakota and Oklahoma, have laws that say the agreements cannot be enforced. Others rely on case law, sometimes refusing to enforce those with unenforceable provisions or, like Maryland, modifying contracts found to be overly broad to make them enforceable, experts said.
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Starr's research found that non-competes are used as much in states that don't enforce them — such as California — as in states that do.,
He started studying non-competes because of an interest in the tension between management's desire to retain workers and employees freedom to move, he said. The arrangements, which date to the 1400s, were used initially by master craftsmen to prevent their apprentices from opening a rival business in the same town.
"Non-competes are one tool managers utilize to control the movement of workers," and may prompt some companies to invest more in employee training and retention, Starr said. But "I'm not sure we've come down yet on whether these things are good or bad. The evidence is that they are bad for some type of workers and good for others. There are many stories of people who have been harmed by these contracts, people who were not compensated for what they gave up."
When agreements are challenged in court, judges often end up revising the agreements, Kleinmann said
"A court can say it is too broad...and blue pencil the agreement to make it shorter or narrower," he said. "Courts don't want low-level employees getting hurt. But we find that courts are not pleased with employees that steal things and then take clients."