How Non-Competes Impact Employee Retention

How Non-Competes Impact Employee Retention

July 18, 2022

By Partner Jackie Homann

The rapid expansion of freelance work in the gig economy has dramatically changed the U.S.’s labor force. Many workers—even if they already have part-time or full-time work—have taken on freelance projects as a main or supplementary source of income.

Along with this shift to gig work, many businesses are implementing non-compete agreements with freelancers. But navigating one of the most competitive job markets in years should cause business leaders to pause and reevaluate their non-compete covenants and agreements. Employee retention is the name of the game in 2022.

What is a Non-Compete Agreement?

Before we dive into how employers and employees can best navigate the freelance landscape, we first need to understand what non-competes are. Non-competes are typically used to limit competition between an employee and his or her former employer. Employers use them to protect their confidential information and trade secrets. In typical non-compete agreements, an employee agrees not to work for or become a competitor for a defined period of time. 

A non-compete usually includes these elements:

  • the date the agreement takes effect;
  • the reason for enacting the agreement (usually to protect certain business interests);
  • a definition of competition;
  • specific dates within which the employee is prohibited from “competing” with the employer—including any time after the employment contract terminates;
  • the geographic location covered; and
  • the consideration the employee will receive for agreeing to the non-compete.

When are Non-Competes Enforceable?

Each non-compete—including the reasons for entering it, the geographical area it covers, and the effective time period—is unique. So there isn’t a definitive way to determine if a particular one is legally binding. Notably, in North Dakota, Oklahoma, and California, non-compete agreements are unenforceable.

Outside of those states, non-competes are generally enforceable if their restrictions, time limits, and geographic scope are “reasonable.” And if the agreement identifies the specific competitors with whom the former employee cannot associate, and prohibits the employee from opening a new business in the former employer’s specific industry, it’s got an even better chance of holding up. State law determines how courts interpret and enforce these agreements.

One aspect of non-competes that many businesses are now focusing on is how the competition restrictions work. For example, let’s say someone works for a clothing retailer selling mass product to clients. If that person leaves that business and their sales job and goes to work for another clothing retailer as a janitor, the non-compete would likely be unenforceable. 

Adjusting Non-Competes for the Current Environment

Some non-compete agreements signed even just a year ago may be invalid in certain states. Statutory changes in Illinois, Nevada, and Oregon have limited the enforce­ability of non-compete agreements. In Illinois and Oregon, employers may not implement non-competes if the employee makes less than $75,000 and $100,533 respectively. In Nevada, employers may not enforce non-competes for employees that work on an hourly-wage basis.

It's important to speak with a qualified lawyer in your state to determine if your non-competes are still enforceable.

Remote Work Considerations

Remote work is just one of the many facets of life that will never be the same post-pandemic. With this in mind, there are further complications for those employees who work remotely and are not employed in the same state where they live. States like Massachusetts, Washington, and California have enacted laws that restrict whether a non-compete may include forum-selection or choice-of-law provisions. Such provisions essentially dictate which state’s law will be used to interpret the non-compete and which court a case would go through should a dispute arise.

Employers must be aware of the state laws surrounding not only their business, but also the laws of the states where their employees live and work. If an employee lived in a state with laws restricting the enforceability of non-competes with forum-choice provisions, but worked in a state without them, the provision may be unenforceable. Employers should carefully select which state law to apply to non-competes when dealing with remote workers.

Non-Solicitation Clauses

Sometimes, a former employee can become a recruiter for their new employee and “pick off” former coworkers. To avoid this, employers should include a non-solicitation covenant in their non-competes, which restricts employees from soliciting a company’s clients, customers, or employees for his or her own benefit. Employers must take existing case law and statutes into account if they are including non-solicitation clauses in a non-compete.

Visit this National Law Review article for more details on current law changes regarding non-competes.

How Non-Competes Impact Retention

Non-competes generally aren’t considered a retention tool in a conventional sense of incentivizing employees with a signing bonus or extra benefits. To dive into semantics, a non-compete may not necessarily persuade an employee to stay, but it might persuade an employee not to leave. They are a great method for employers to protect their investment in employees. A 2021 study of 11,505 workers found that 38% of workers report having worked under a non-compete agreement at some point in their career and 18% are currently bound by one.

But many employees don’t actually understand the terms of their non-compete agreements. As a general good business practice, employers should ensure that employees fully grasp the implications of the non-compete to avoid a legal dispute down the line. This benefits both the employee and the business.

Employees should also know that non-competes often impact the work you do while at the company, not just what happens after your employment period ends. For example, non-competes often restrict employees from working for a competitor on the side and prohibit employees from sharing valuable or exclusive trade or industry secrets during or after their employment tenure. Employers should consider how such stipulations may impact retention.

When it comes to non-competes and contracts of all kinds, the devil is in the details. Employers should be sure to consult an experienced lawyer when creating and implementing non-compete agreements with employees.

If you need help navigating non-competes or employment law, give the lawyers at Jones Obenchain a call!