By Marianne Jennings
Non-compete covenants are generally a way if life in the tech industry and among the executive ranks. Those who work in those types of positions have significant non-public information that could be taken to competitors should they switch employers. However, the covenants are spreading in two different ways. The first way is not actually a covenant in the employee’s agreement or something that the employees sign as part of the requirements for hiring. The non-compete covenant is part of the employer’s franchise agreement. Burger King, Carl’s Jr., and Pizza Hut have agreements with their franchisees that they will not hire workers away from another franchise. So, for example, Pizza Hut will not hire employees from another Pizza Hut. Rachel Abrams, “Trapped in Fast Food’s Slow Lane,” New York Times, September 28, 2017, p. B1.
Companies say that the clauses are needed because of the time and expense that franchise owners put into training employees. The covenant-not-to-hire allows them to protect their investment in their employees. On the other side, employees say that the clauses mean they cannot transfer, negotiate for higher wages, or better hours. There have been two lawsuits filed that challenge the franchise clauses as violations of antitrust and labor laws. McDonald’s once had the clauses in their franchise agreements but has removed them despite their view that the clauses are legal.
The second expansion comes from legislative changes in some states on the enforcement of covenants not to compete. For example, in Idaho, the state legislature changed the burden of proof so that employees are required to prove that their leaving their employer to work for a competitor would NOT harm their current employer. In most states, the burden of proof is on the employer to establish the harm that would result if the employee goes to work for a competitor. Idaho has limited the application of the shift in the burden of proof to “key employees.” A key employee is defined in the statute as:
So, employees in Idaho who are key employees would have to show either that they do not fit into the categories covering key employees or that their new work would not threaten the current employer’s business.
The estimate is that one-fifth of all employees in the United States are covered under a non-compete agreement. Conor Dougherty, “Battles Simmer As Workers Try To Go To Rivals,” New York Times, July 15, 2017, p. .... Generally, non-compete agreements are in disfavor in the courts, and some states, such as California and North Dakota, simply do not enforce the covenants.
Often the legislative battles (and they have occurred in Utah as well as Idaho) are seen as being between longstanding businesses and start-ups. Both Idaho and Utah have been hotbeds for entrepreneurs and start-ups. But, there are economic arguments in favor of employees when non-compete clauses are not enforced. In one example, a Boise start-up poached two software engineers from an established company. Initially, the owner of the established business was ready to litigate to enforce the covenants not to compete that covered the engineers. Instead, he spent the money on increasing the compensation for his remaining employees. So, the new company hired two engineers away from the existing company, but twelve engineers at the existing company got pay raises. Today, the owner of the established business is in favor of restricting enforcement of covenants not to compete because the result was a better marketplace for all employees and his becoming a better manager. He said that he began to create an environment that made his employees want to stay with his company.
Explain the two new areas of regulation of covenants not to compete.
Discuss the economic pros and cons of covenants not to compete.
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