Recently, the federal government has advised state governments to introduce reforms regarding non-compete agreements. In the business world, non-compete agreements usually take the form of clauses in legal agreements in which employees promise not to enter into a job with another company which is similar to the position at the company where he currently works. This call for reform comes after the Treasury Department, along with the White House, has researched the effects of non-compete agreements on overall employment levels.
How non-compete agreements affect employment
The White House has found that non-compete agreements have had a chilling effect on employment, actually limiting employment options for an estimated 1 out of 5 workers in the country, which in the long run can hamper job growth and negatively affect employment. Consequently, state governments have been advised to take a variety of measures to address this issue. These include banning non-compete clauses for certain types of workers, such as those in the public health and safety industry, as well as those who do not have access to “trade secrets.” Such measures would also affect those who work under a certain salary threshold, or employees who are terminated or laid off without cause.
Other reforms include increasing the transparency of these non-compete agreements. This includes making employees more aware of non-compete agreements for jobs by giving them notice of these clauses in their employment contracts. For example, in some cases an employee is only notified of non-compete agreements after accepting a job offer (when the employee has had to turn down offers from other companies to accept the offer) or after being promoted to a new position.
What this means for companies that use non-compete agreements
The fact that the federal government has chosen to have these reforms implemented on the state level shows that they are aware of how circumstances differ by state, and that they understand that a sweeping set of government regulations is unnecessary. At the same time, this decision highlights the very real fact that some companies tend to overuse non-compete clauses to discourage workers from leaving their employment and going to work for competitors. In doing so, they are sometimes tempted to use these clauses where they are not necessary, and this can have negative consequences, such as opening a company up to litigation (which can cost the company money), or discouraging prospective employees from even accepting a position at that company in the first place.
Companies instead should only utilize non-compete clauses where necessary and in only very narrow circumstances, such as when they need to protect trade secrets, or need to ensure that an employee is not in a position to disclose sensitive information regarding company business. In doing so, companies are not binding the hands of every single employee, some of whom are not in a position where a non-complete clause is necessary (or enforceable).
Companies use non-compete clauses to protect their business, but need to know when and when not to use them to avoid negative consequences associated with overuse or misuse. To accomplish this, HR staff can serve to inform companies of when non-compete clauses are a good idea, and can play a proactive role in ensuring that their company is both protecting itself while at the same time playing fair with their employees.
