By Joseph Kanfer, Esquire; Woolford Kanfer Law, P.C.

Recruiting and retaining skilled employees has long been a challenge in the construction industry, and the COVID-19 pandemic has made retaining employees more urgent than ever. Non-compete agreements can be powerful tools to protect your business against losing key employees. Non-Compete agreements prohibit employees from working for a competitor in a particular geographic area for a specified period of time. The rules for non-compete agreements vary widely among states, and the law surrounding these agreements is rapidly evolving. Before considering non-compete agreements for your business, it is important to understand the rules for enforceable non-compete agreements in your state and how the law may change in the near future.

Non-compete agreements should further an important business interest

While the law surrounding non-compete agreements varies among the states, there are a number of principles that apply in most states where these agreements are enforced. Because non-compete agreements limit a former employee’s ability to earn a living, they are strictly construed by the courts. As a result, most courts will only enforce non-compete agreements that further an important business interest. For example, salespersons often develop close relationships with customers, and a non-compete agreement can help prevent the salesperson from bringing those customers to a competitor. Upper-level management employees may gain confidential information about the inner workings of a business that they would inevitably use when working for a new employer, and non-compete agreements can prevent this knowledge from being taken to a competitor. You may also invest heavily in specialized training for your employees, and a non-compete agreement can protect your investment in those employees. Depending upon your state’s laws, these may be legitimate business reasons to support a non-compete agreement. Courts will generally not enforce non-compete agreements if the purpose is to punish employees who decide to move on.

Non-compete agreements must be reasonable in scope

A non-compete agreement should only prohibit a former employee from working for competitors in a specific geographic area. This area should be based upon the area where the employee performs work for you. However, there may be other considerations that warrant a broader geographic scope, such as when an employee has access to confidential information about operations in other geographic areas. Courts will also look at the duration of the restrictions. Courts will not enforce a non-compete agreement for an unlimited period of time. Common lengths are one or two years, but ultimately the court is going to consider whether the duration of the agreement is reasonably necessary to protect your legitimate business interest. And, a non-compete agreement should only restrict employees from working in fields or areas in which the employee was involved at your company. If a non-compete agreement is too broad in any of these areas, a court may either limit the scope of the agreement or decline to enforce it altogether depending upon the circumstances and the laws of your state.

A 2016 Illinois lawsuit against the sandwich chain Jimmy John’s illustrates how overly broad non-compete agreements will not be enforced. Jimmy John’s formerly required all of its employees, down to delivery drivers and sandwich makers, to sign non-compete agreements. These non-compete agreements prohibited all former Jimmy John’s employees from working in any sandwich store located near any Jimmy John’s location in the United States (of which there are thousands) for two years after leaving their employment. This practice got the attention of the Attorney General of Illinois, who sued Jimmy Johns arguing that these agreements were overly broad and therefore unenforceable. Jimmy John’s ended up settling the lawsuit by agreeing to eliminate its non-compete agreements and paying the state $100,000. While this type of lawsuit is unusual, it illustrates that courts will not enforce non-compete agreements that are too broad and do not support a legitimate business interest.

Non-compete agreements may need to be supported by consideration

Many states have a requirement that the employee receives something of value in exchange for signing the agreement. In some states, having the employee sign the non-compete agreement when employment begins will satisfy this requirement, though in a few states this is not true if the employee is “at-will” and can be terminated at any time. In many states, giving an employee a promotion or a raise also counts. In a few states, a non-compete agreement will be enforceable even if the employee does not receive anything in exchange for signing the agreement. It is important to know your state’s laws before deciding whether and how to implement a non-compete agreement to ensure that the agreement can be enforced.

Non-compete agreements are increasingly limited by law in many states

In recent years, state legislatures across the country have enacted laws to limit the enforceability of non-compete agreements in different circumstances. So far this year, at least three states – Oregon, Illinois, and Nevada – and the District of Columbia have each adopted new restrictions on non-compete agreements. One recent trend is for states to enact laws that prohibit use of non-compete agreements for employees who make less than a certain hourly wage or salary. Other states prohibit using non-compete agreements for hourly workers at all. Some states have adopted disclosure requirements where an employee must be given advance notice of the non-compete agreement before being expected to sign it. A handful of states, including California, Oklahoma, and North Dakota, prohibit use of non-compete agreements except in certain limited circumstances such as in conjunction with the sale or purchase of a business or among business partners. Each state’s laws are unique, and you should be familiar with what your state allows before implementing non-compete agreements for your employees.

Non-compete agreements may be limited by federal law in the near future

Enforceability of non-compete agreements has historically been a question of state law. However, the Biden administration is trying to change that. On July 9, 2021, President Biden issued an Executive Order entitled Promoting Competition in the American Economy that contains a provision requesting that the Federal Trade Commission (FTC) prepare regulations to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly impact worker mobility.” This Executive Order does not itself ban or limit non-compete agreements. It is essentially a recommendation that the FTC consider adopting rules limiting non-compete agreements, although it does not specify what those rules should say. If the FTC does decide to propose regulations to limit non-compete agreements, it would have to follow a months- or years-long rulemaking process before issuing regulations restricting non-compete agreements. These rules could range from a near-complete prohibition on non-compete agreements to restrictions on the types of employees who can be covered. The FTC could also decide not to regulate non-compete agreements at all and leave the issue to the states. If the FTC ultimately does issue regulations on non-compete agreements, it is likely that they will be challenged in court, creating significant uncertainty as to the state of the law concerning non-compete agreements.

In addition to the possibility of regulation by the FTC, Congress is considering restrictions on non-compete agreements as part of the Workforce Mobility Act of 2021. The current version of this Act would severely limit non-compete agreements to situations involving the sale of a business or dissolution of a partnership, much like in California, Oklahoma, and North Dakota. This law would also allow employees to sue employers who violate the Act by requiring employees to enter into prohibited non-compete agreements. While this draft legislation has bipartisan sponsorship, the bill is currently in committee in both the House and the Senate and it is unclear whether it will pass those committees in its current form, let alone pass both houses of Congress and become law. Regardless of whether this Act ultimately passes, it is clear that the trend at both the federal and state levels is to restrict non-compete agreements further and employers should anticipate additional regulation of these agreements in the future.

Recommendations for small businesses

Because of the changing legal landscape and the complexity of existing laws, the most important aspect of preparing a non-compete agreement is getting legal advice from a lawyer knowledgeable about your state’s laws. Enforceability of non-compete agreements depends so much on the particular situation and the laws of the state where your employee works, you should never try to use a form non-compete agreement that has not been tailored to your particular situation. A carefully drafted and thoughtfully implemented non-compete agreement can be a valuable tool for protecting your business from losing key employees during this time of unprecedented employee turnover. 

About the Author

Joseph M. Kanfer is a partner at Woolford Law, P.C., with experience litigating a wide range of complex business, construction, and other disputes in both state and federal courts. He has also argued cases before the Superior Court of Pennsylvania, the Commonwealth Court of Pennsylvania, and the United States Court of Appeals for the Third Circuit. Woolford Law provides a wide range of legal services to its diverse client-base, which includes general contractors, subcontractors, homebuilders, real estate developers, municipalities, design professionals, health care professionals, manufacturers, distribution companies, professional services firms, retailers, and communications firms. Click here for more information on Woolford Kanfer Law PC.