The Covid Pandemic Might Have Exposed the Perils of Non-Compete Agreement Over-Use

by Stacey Lett, Director of Operations – Eastern U.S. – Proactive Technologies, Inc.

The recent Covid pandemic has opened up many unforeseen or unconsidered scenarios in human resource management and labor law. One of them is the growing overuse and, perhaps, misuse of non-compete agreements between employers and employees.

In the past, non-compete agreement use was limited to an employer’s need to protect intellectual property and trade secrets. It was enforced sparingly by the courts when an employer could articulate the nature and level of risk to business operation and owner equity. Their use was targeted toward those employees with access to highly sensitive and confidential information, processes or strategies.

These agreements protected the employer against an employee from leaving the company and going to work for a competitor, bringing all this proprietary information with them. A time limit was specified in the agreement when the terms would “sunset,” and for the most part employees and employers respected the agreement’s spirit and intent.

In recent years, encouraged by state employer councils and opportunistic attorneys, non-compete agreements started to appear in non-traditional roles and atypical industries. Some employers began to see it as a way to keep employees from leaving even if the conditions of employment were untenable. After all, if an employee is particularly skilled in an area useful for employer A, what better way to maintain an employee than to say you can leave but you cannot take your skills with you to a similar job with employer B.

This practice had been quietly taking a toll on some workers until events, such the Covid pandemic and subsequent lockdown caused a lot of reconsideration of what was considered “normal” employment practices. Beyond high-tech manufacturing and technology company use, non-compete agreements have found their way into the hospitality, retail and shipping sectors, to name a few. Studies are being undertaken to see if these agreements are playing a role in the shortage of workers employers say they are encountering.

The shipping and logistics industry study by FisherPhillips issued the following call: “Companies in competitive industries like logistics and transportation must strike a balance between protecting sensitive information and promoting integrity, a trusting culture, and opportunity for young employees. While seemingly minor on its face, overusing non-compete clauses in employment agreements could upset that delicate balance, leading to potential state investigations and negative company image. It also could discourage young talent from entering the industry, which ultimately hurts us all… Employers Should Curtail Non-Compete Use.”

The report went on to say, “Government agencies have grown increasingly skeptical of these clauses, and companies that overuse non-competes could make themselves targets for costly investigations.” Non-compete overuse may be one of the disruptors that lead to the current shortage of drivers.

Situations where a worker is laid off by the employer can change the enforceability of non-compete agreements and are being challenged today in increasing numbers. Another scenario that has become pronounced during the pandemic is when a distressed company is acquired or companies merge. A number of factors may change relative to the original agreement, but in the past the courts have interpreted non-compete agreements between businesses assertively. “

In some “right to work” states, until now courts have continued to side with employers with regard to non-compete agreements. After a business sale or merger. Attorney Wesley D. Few of South Carolina said, “Guess what, the rules for non-compete agreements related to the sale of a business are different…if a business owner sells his or her business and agrees to a non-compete, the terms of the agreement will likely be longer, e.g. up to 3 or even 5 years, and the likelihood it will be enforced is much greater.” What that means to an employee with a non-compete agreement with the sold business with its own non-compete agreement in the time of Covid is unclear.

Regardless, this overuse is getting attention. The White House issued a statement July 9, 2021 saying, “ Over the last 40 years the startup rate has halved, job mobility has declined 22%, and real wages for the bottom 90% of earners have grown by only 0.4% per year, with the lowest 10% of earners seeing real wages fall by 5% over this period. Is this the economy Americans want? What, if anything, can policymakers do to reverse these trends?”

“While there are certainly many factors underlying these patterns, two distinct employment practices have come under increased scrutiny because they curtail individual freedom to pursue better job opportunities: covenants not to compete (non-competes) and no-poach agreements. Non-competes, which in 2014 covered approximately one out of every five labor force participants in the United States, prohibit individuals from joining or starting competing businesses, typically within time and geographic boundaries.”

The statement continued, “The use of non-competes is so pervasive that even volunteers in non-profit organizations, in states that do not even enforce them, are asked to sign away their post-employment freedom. No-poach agreements, which are compacts between employers not to hire workers from each other, have also spread. Estimates suggest they covered nearly 60% of major franchises in the United States in 2016. Given that these constraints prevent individuals from starting companies or taking better jobs in their chosen field, it is not difficult to see how the expansive use of these provisions could contribute to the observed declines in U.S. economic dynamism.” An Executive Order issued the same day is meant to start the change process for con-compete agreement usage, among many other things.

Non-compete agreement should have been used strategically but sparingly anyway, given past legal guidance. Massive workforce disruptions may drive those who tried to take it to the next level back to where it was. For more information about non-compete agreement overuse, download “The Use, Abuse, and Enforceability of Non-Compete and No-Poach Agreements: A Brief Review of the Theory, Evidence, and Recent Reform Efforts.”

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