A recent New York Times article entitled "When the Guy Making Your Sandwich Has a Non-Compete Clause" highlights how employers are increasingly compelling their low-level, minimum-wage earning, employees - yes, even deli clerks - to sign non-compete clauses that purport to bar them from working for a competing business.
We're not talking about high-level executives with the secret formula to Coca Cola being prevented from taking that to Pepsi.
There are a number of challenges that this practice poses, and, I would argue, will lead to worse results for employers before the courts.
First, even if the non-compete provision wouldn't be enforceable in a New York court - and chances are that it would not be upheld for low-level employees like the sandwich maker in this story - it is highly unlikely that the employee has the financial wherewithal to fight a lawsuit brought by his former employer. In other words, he probably can't afford to defend his right to seek a better job.
Second, and in a parallel vein, courts know this. And, if they think that employers are overreaching and punishing otherwise loyal employees, the courts will, over time, be less sympathetic to protecting employers' interests, and will look for ways to invalidate the non-compete - even in cases that are closer calls.
Overzealous Non-Competes Lead to New York AG Investigation
Apparently, an employer who goes overboard with their non-competes risks a lot more than just having a court find the agreements unenforceable; it seems they could incur the wrath of the New York State Attorney General, and trigger an investigation into their employment practices.
And, that is precisely what appears to have happened to the restaurant chain Jimmy John's, who compelled their minimum-wage employees to sign non-compete agreements barring them from working for any store that:
"(1) makes more than 10% of its revenue from selling sandwiches; and,
(2) is located within a two-mile radius of any Jimmy John’s Sandwich shop nationwide.”
While New York's courts will honor non-compete agreements when tailored to protect a business's legitimate interests, they were never intended to protect an employer who seeks to prevent minimum-wage workers that had no access to, or knowledge of, any corporate trade secrets whatsoever from advancing to better-paying jobs.
To be sure, an Attorney General stepping into a private employment contract dispute such as this is rare. But on some level, the ultimate outcome of this investigation is almost secondary the central takeway which is this:
I cannot imagine there is any employer that would welcome being investigated, let alone by an Attorney General. Simply put, even if the investigation is ultimately dropped, he loses the time, effort, money and aggravation of defending against the investigation.
In this instance, at least at first blush, there doesn't seem to be any valid business justification for trying to force low-level employees into, effectively, indentured servitude. Therefore, employers would be wise to limit their non-competes to those "key" employees who have access to sensitive corporate information and client lists, and thereby avoid triggering an investigation by pro-worker governmental authorities.
Why You May Not Want a Non-Compete in Your Business
In an interview with Inc. Magazine, a Wisconsin-based CEO laid out the best reason for never having your employees sign a non-compete.
Although his position is perhaps a bit extreme, it certainly has a logic to it, and it is no less true today than it was back in 2007.
According to Ken Hendricks, founder and CEO of ABC Supply, in Beloit, Wis., non-competes are a losing proposition - even from the employer's side of things - because they foster mistrust:
Hendricks opined that if the company is doing what it is supposed to do, i.e., paying well relative to the market for the job being performed, and providing a nice place to work, there is no reason to live in fear of employees leaving in droves and taking clients and/or other employees with them.
In my view, here's the money quotation:
"If you have to hold employees by using an agreement, you don't have much in the first place."
"Noncompetes are for people who are afraid of their own incompetence," says Hendricks.
Strong words that may be hard for some to hear. But does he have a point?
Consider this: a recent article in the Harvard Business Review suggests, based on an informal study, that employees bound by a noncompete will underperform at work.
As with most things, there are a number of different ways to approach this study and its conclusions, particularly from the vantage point of an employer.
First, and at the risk of stating the obvious, the authors confuse association with causation. The study is lacking the most basic elements needed for a truly viable scientific study, such as control groups and an accounting for other confounding or complicating factors.
In other words, just because some employees who have a noncompete clause don't perform as well as other employees who don't have such a restriction doesn't necessarily mean that the non-compete is THE reason for their discrepancy in performance.
Second, at least in my view, the entire premise for the manner in which the study was conducted is inherently flawed; offering unvetted people money to perform some tasks is not nearly the same as people in the context of a regular, established job that they rely upon to feed their families.
Third, there is no indication as to what kind of cross-section (if any) these "employees" were culled from; for all we know, they could have all come from one city, age group and particular field of work. Naturally, if that were true (and I hope it's not), it would seriously undercut the credibility of the authors' conclusions.
That said, I still think there is a valuable nugget for the employer to consider: is it possible that binding a prospective or current employee to a non-compete will hinder their job performance? If so, is the trade-off still worth it?
Final Thoughts on Employers Taking Non-Competes Too Far
A more rational, balanced approach would be to allow these employees the freedom to go where they want - provided they don't actively solicit or poach any other employees or current customers of the business. And that is far more likely to be upheld because an employer, generally speaking, has a legitimate interest in protecting his employee roster and clients.