The changing face of the non-compete agreement

For many years now, companies have used non-compete agreements both to prevent employees from joining competitors and as a de facto retention tool. But new trends in the legal and labor landscape suggest that companies reconsider their reliance on these non-competes to achieve their goals.

It’s no secret that courts and state legislatures have dimmed their views of these sorts of restrictions, looking at non-compete agreements with increasing disfavor. Between ensuring that agreements comply with unique state laws and meet higher bars of reasonableness in court, enforcing non-competes is now more difficult and expensive than ever.

Related: DOJ aggressively pursuing ‘no-poach’ agreements

Yet, amid the Great Resignation and period of record unemployment, the careful approach of better tailoring non-compete agreements may backfire not in court, but in the labor market.

Employees are joining employers already thinking about their next landing spot. The high demand and, thus, competition for labor also means employees have more options than ever for employment. Those options mean leverage — and employees are using that leverage to demand flexibility and the possibility of future mobility.

Today’s savvy employees are analyzing their career choices differently, often choosing not to work for organizations that require immediate signing of a non-compete. It is routine now for an applicant to have multiple job offers, and if one offer demands the applicant to sign an onerous non-compete agreement while another offer does not, the applicant’s choice may be easy: take the job that respects the employee’s desire to have future employment options.

What are employers to do?

First, employers who are intent on using non-competes to protect their secret information or critical customer relationships should ensure these agreements are used only where the need is more acute. That means limiting non-competes to subsets of employees that would more obviously pose harm if they were to join a competitor, like with higher-level executives who truly hold the “keys” to the business.

But there’s another approach that forward-thinking employers can take to give themselves a competitive edge for talent. Today’s employers should start to view their use (or, rather, their non-use) of non-compete agreements as a carrot for recruitment rather than a stick for retention. Employers can still protect their interests as well as demonstrate they can provide the flexibility that employees desire.

They can do so by shifting from non-compete agreements to less restrictive (and more likely enforceable) agreements, such as customer non-solicit agreements for employee subsets like the salesforce and company confidentiality agreements for most others.

Customer and employee non-solicits generally can protect an employer’s lifeblood — its customers and talent — from the risk of a departing employee poaching those relationships. However, they still allow employees to move jobs, even to a competitor.

Importantly, customer non-solicits can be coupled with confidentiality agreements to protect an employer’s business secrets, but again allowing employees to depart. These pairings can potentially be used with all employees as an alternative to non-compete agreements, providing enticing flexibility when applicants apply and the requisite enforceability when employees leave.

Time to reassess

Now is an especially good time to re-examine restrictive covenant agreements.

In addition to the workforce changing from a buyer’s market to a seller’s market, many companies have out-of-date policies that can prove costly if not addressed. For example, many companies forbade the use of cloud storage or removable storage devices when employees worked in an office but then leaned heavily on the same tools to conduct business when they quickly pivoted to remote working environments during the worst parts of the pandemic. Employers should make sure their documented policies regarding employee use of data and electronic storage reflect what the company requires on a day-to-day basis.

The workforce is entering into a new era; so too are restrictive covenants. By aligning policies with the nature of today’s workforce and how employees conduct their work, companies can enhance the enforceability of their employment agreements and avoid falling behind.

Joel Andersen, Katie Connolly and Christopher Ruska are labor and employment attorneys at Nilan Johnson Lewis who work with both employers and employees to help enforce employment agreements and defend against claims of breach.