AccelPro | Employment & Labor Law
AccelPro | Employment Law
On Crafting Effective and Enforceable Non-Compete Agreements
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On Crafting Effective and Enforceable Non-Compete Agreements

With Jay Zweig, Partner at Ballard Spahr | Interviewed by Matt Crossman

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Welcome to AccelPro Employment Law, where we provide expert interviews and coaching to accelerate your professional development. Today we’re featuring a conversation about non-compete agreements. Our guest is Jay Zweig, a partner at Ballard Spahr who has been an employment attorney for more than two decades.

Non-compete agreements, as well as other restrictive covenants like non-solicitation agreements and confidentiality agreements, have drawn a lot of attention in recent years because of changing workplace norms in the post-Covid world. The FTC and NLRB also have explored nationwide bans, with an FTC vote expected this year.

Zweig says the key to an effective and enforceable non-compete agreement is that it has to be reasonable in terms of who gets it, what it covers and how long it lasts. He advises his clients to be circumspect about which employees to ask to sign non-competes.

He also pushes his clients—sometimes they don’t like it—to be less aggressive than they might want to be in terms of how long the non-compete lasts after an employee leaves. If it’s longer than a year, a court might deem it unenforceable.

Listen on Apple Podcasts, Spotify and YouTube.


Interview References:

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TRANSCRIPT

I. NON-COMPETE, NON-SOLICITATION AND CONFIDENTIALITY AGREEMENTS

Matt Crossman, Host: We’re going to talk in-depth about non-compete agreements, and I want to first define terms. “Restrictive covenants” seems to be the broad term that encompasses a couple of different kinds of agreements. Can you explain the differences between non-competes, non-solicitation and confidentiality agreements?

Jay Zweig: Great question, and that’s something for practitioners, companies and executives to be aware of. At the base level, you have confidentiality or non-disclosure agreements. That’s to protect non-public proprietary information or trade secrets of a company. These are very standard, either in employee handbooks or in potential business transactions or broader employment agreements.

At the next level, you would have what I would call a non-solicitation agreement. That would be a pledge by someone who is in a trusted role not to capitalize on relationships that they obtained through the business and instead leave them alone for a period of time. It tells them not to have a conflict of interest and not to try to take away business. 

A similar type of non-solicit is what you might call a non-poach agreement or non-hiring agreement, and similar to a customer or business non-solicit, a non-poach agreement says if you leave the company or you start a venture or you want some help on your side gig, don’t use our employees to do that because our employees are supposed to be focused on working for our business.

Those three are bedrock types of things that most companies really should be aware of and be diligent about. The highest level of restriction is a non-compete, and a non-compete says for a period of time, a former employee must stay out of that business within certain restrictions.

MC: One more topic I want to discuss before we get in the nitty gritty, and that is why now? To quote from a piece that you wrote, “an increasing number of states are severely limiting or absolutely prohibiting the use of restrictive covenants.”

You’ve been working in this field for decades. Is this a cyclical thing or is there something else happening?

JZ: Certainly there are politics involved, and we see in the current administration, both during the election and since the current administration federally has been in place, that it is much more worker-focused—union protections, expansion of worker rights, expansion of leave. That’s a government initiative that we’re seeing. 

Beyond that, post-pandemic, you’re really seeing much, much more fluidity in the labor market, where people have their side gigs. Companies are concerned about what the employee is doing if they’re working a hybrid schedule or a remote schedule. And the tension regarding these restrictive covenant agreements is just a symptom of that overall resetting of what’s going on in the workforce.

II. WHO GETS NON-COMPETES AND WHY

MC: Let’s talk details. I listened to an interview you gave about what goes into an agreement. The key word was reasonable. To be enforceable, a non-compete has to be reasonable. There seem to be three factors. The first is who gets them and for what reasons. The second is geography. The third is how long they last. And I want to tackle those one at a time. The first is the question everybody wants to know the answer to—who should get them and why should they get them?

JZ: Reflecting back on your last question, part of the backlash, if you will, against these agreements is that many companies have had everyone sign the same level of restrictions from the C-level executives to the hourly worker on the line. 

It is really important in this environment for companies to be circumspect about who they need to have protections from, and how long should those protections last, and what’s the scope of those protections. So again, if you have a CEO and you say we don’t want that CEO to go work for a direct competitor for a period of time if they leave our company, most people can understand that. But if you have the executive assistant to the head of sales being kept out of an industry for a period of time, that’s much more difficult to justify.

So to your question, who gets these agreements? That’s the first thing that the company should think through. Who gets them, and then along with that, what is the business being restricted? 

If you have, for example, the CEO of a hospital chain and you say, “CEO of hospital chain, you cannot work in the health-care industry.” Many courts are going to find that to be too broad because this is a hospital chain—why couldn’t this person go work in managed care or senior living or hospice or something where there are services provided and maybe a hospital does some of them, but it really isn’t the hospital’s core business? So who gets them and what is the business being restricted—those are initial inquiries.

MC: Does training fit into this as well? Will the company restrict somebody because it feels like it spent a lot of money training them, and it doesn’t want them to leave and take that training with them elsewhere.

JZ: That really is something that is disfavored in the law. I think it’s a really good point, and it might justify some sort of agreement that if the company came out of pocket for the training, there might be some sort of agreement to reimburse. But the type of career development in training of employees is generally something that courts are not very sympathetic to restricting someone from leaving because of that.

MC: Is there anything else on who gets them that our listeners need to know before I move ahead to geography?

JZ: Well, I think the other piece of that is who already has them? A threshold step we’re doing with our clients is saying if you have restrictive covenants that are 2, 3, 4 years old, sometimes even older than that, those are really things that you need to dust off and review.

MC: How often should you be reviewing these documents and what are some best practices there?

JZ: The best practice is to do it now and do it in response to all the things we’ve been talking about—the federal government coming down very hard on the side of free market, free worker mobility, the FTC, now the NLRB coming out and saying, “We don’t like non-competes and we’re going to outlaw them,” and then the various local, states, cities, municipalities, that are saying, “We’re going to ban these things or restrict them.” 

And one other thing I will mention is before the end of the year is also a really good time to do this because many employers will pay a year-end bonus or a holiday bonus, and year-end is often the time when raises are being considered.

In many states, there needs to be legal consideration where the employee gets something for signing a new agreement. And from a human-resources perspective, you can also tie it together. “Hey, we’re about to pay bonuses. While we’re doing that, we’re updating our agreements. Sign here. Your bonus check will be on its way.”

This takes some time because you’re going to want a lot of people in your organization to weigh in on this.

III. WHERE THE EMPLOYEE LIVES MATTERS … SOMETIMES

MC: Let’s move to geography. This is, I’m guessing, changing as the world changes. It used to be that a non-compete would prevent you from working for a competitor within a certain mileage distance. Has modernity made that all but irrelevant?

JZ: It’s not irrelevant. But it is a factor, and courts will look at that. It’s somewhat dependent on the business. For example, if you have a car wash or a medical practice or you sell memberships to folks who go to a gym, the customer base is within a certain proximity of those types of facilities, and so geography could become important.

If it’s a national or worldwide business or something where customers are from many different places, then geography is not as critical. And this is where a non-compete could interface with a non-solicitation of customers.

MC: Another compounding factor here is the company might be headquartered in one state and you’re hiring a person who lives in another state, whose laws are completely different. Some states have outright bans on non-competes. Colorado has made it a criminal offense to enforce an illegal non-compete. What advice do you have for HR directors and employment attorneys working for companies with employees scattered across the country?

JZ: Know the local laws and make sure that your application of non-competes is consistent with the laws of where you are restricting people. Some companies choose—and they’re entitled to do this—to have a choice-of-law provision in these agreements and make them all Delaware law or all the law of a state that is favorable to employers. And we certainly understand and work with those. But as you pointed out, if you attempt to enforce one of those agreements in a state like Colorado or California, which also traditionally is extremely hostile to non-compete agreements, you’re going to have difficulty. So it is very important to know the local laws and what you can and cannot do.

IV. HOW LONG IS TOO LONG AND HOW SHORT IS TOO SHORT

MC: We’ve talked about who gets the agreements. We’ve talked about the geography component. The third and final piece of that puzzle is length of time. How short is too short, how long is too long, and how do you make those decisions?

JZ: I’m going to default again to, it’s a case-by-case basis, but the legal standard for practitioners and companies looking at these agreements is to determine the least amount of time that we can restrict someone and have a reasonable opportunity to A, recruit and hire a replacement, get them trained up, and B, have our customers and their co-workers get familiar and comfortable with them.

Many states have statutes that say anything above this amount of time is presumptively bad or not enforceable. But I will tell you on most non-compete agreements, unless it involves the sale of a business or the most senior of C-level executives, in my experience going to court and enforcing these, which I do a lot, anything over one year is going to draw a lot of scrutiny.

And what I do when I’m drafting these agreements is I push my clients a bit. Sometimes they don’t like that, but I’ll raise the question and say, “Can you live with nine months? Can you live with six months?” 

Because the less time that you say to someone, “You can’t work in the industry,” the better business justification you can have for that transition time.

MC: Before I move on to separate questions, did we cover it all? Those were the questions I knew to ask. For an HR executive or attorney who’s listening to this, what else do they need to know?

JZ: What they need to know is to put protocols in place when someone joins a company to make sure that the restrictive covenants, all of the confidentiality agreements, everything we’ve been talking about, gets signed and put somewhere it can be retrieved. 

It’s a cradle-to-grave approach. You’ve got to make sure these things are signed and acknowledged. And then at the end of the employment relationship, it’s really important, you can have your lawyer do this, but the HR department can also perform the function very well, when someone is leaving the company, as part of their exiting, off-boarding process, they should get a letter from the company or the company’s lawyer. It could be very friendly, but just saying, “We want to remind you that you have these post-employment restrictions. Here’s another copy of what you signed. The company takes it seriously, and we’re going to protect our rights. We wish you well. Go on and go forth.” 

We have many instances where employees just conveniently forget about these things. And the one other thing for the HR department: When you are hiring someone, you want to be very intentional about asking them in writing about whether they are subject to any post-employment restrictions from their former employer.

We’ve unfortunately had to represent a number of businesses who hired someone who, believe it or not, forgot or just didn’t disclose to the new company that there was a restrictive covenant in  their previous job. The new employer can be liable for interference if they bring on someone and they import trade secrets from their former employer, or they violate a restrictive covenant, so that’s another thing for HR people to look at: When you’re hiring someone, what should you be worried about?

V. USING YOUR EXPERTISE TO BE OF SERVICE

MC: Now I want to pivot and ask you some professional development questions. You’ve been an employment attorney for 25 years. Did you choose employment law? Did it choose you?

JZ: I had outstanding mentoring at the start of my career, and for lawyers at whatever stage of their career, it’s really important to align with mentors and trusted colleagues you can collaborate with and people that you can learn from. 

I’m always learning. This isn’t a junior-senior lawyer thing. I get more out of being a mentor than I give as a mentor. I learn a lot. 

I was mentored by an excellent mentor who was an experienced labor and employment lawyer. And they had a huge passion for this area of law and the balance between doing what’s fair for employees and retaining employees and paying appropriately and a respectful environment and also protecting the rights of the business to stay in business.

I’ve really focused my career on representing employers, and sometimes you have a manager or someone who’s not been trained or just doesn’t feel the way you and I do about fairness. In those instances, I’ve been really pleased to have an opportunity to say to the business, “This isn’t right, and this is creating liability for you. I’m not your moralist, I’m your attorney, but if you let this manager run amuck or not follow the law, there are going to be monetary consequences.” And some of the areas like employee safety, OSHA law, things like that, people can die. 

I have great respect for companies who recognize that their human capital, their people, are their No. 1  business asset. It’s really a wonderful opportunity to be of service.

MC: One more question after hearing that passionate answer. I’ve asked that question of a lot of people. I get somewhat similar answers. The thing that almost makes me jealous of employment attorneys is all of their cases involve trying to help a person solve a problem. Sometimes you help them solve it, sometimes you don’t. But the point, is you get to try to help them. 

Did you know as you were going into it that it was going to be such a life-enriching profession? If you didn’t, can you recall a moment where you thought, “Oh, I made the right choice for my career. This incident proves it.”

JZ: My aha moment was very early in my career. I graduated law school at a pretty young age. Other than being a paperboy and working at Baskin Robbins and having the usual kind of summer jobs, I was not in the workforce. 

I went straight through school, had a wonderful caddy scholarship to attend Northwestern University. Then I went on to the University of Texas for law school. I started in the workforce and my aha moment was probably in my first or second year of practicing when I gave some advice to a company, to someone who had a lot more experience in human resources than I had in legal practice.

And they took the advice seriously and even followed the advice, and that was fairly addictive to say that I could deploy my education and my preparedness. If I was prepared and had reasons for the advice I was providing, people, gosh darn it, would follow it. 

And again, part of that’s being of service. Part of it’s probably ego, but it said to me, “there’s a lot you can do because clients want to put trust in their attorneys.” It’s incumbent on me as the attorney to not only earn that trust, but continue to earn it every single time I engage with that client.

Listen on Apple Podcasts, Spotify and YouTube.

This AccelPro audio transcript has been edited and organized for clarity. This interview was recorded on August 9, 2023.

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AccelPro | Employment & Labor Law
AccelPro | Employment Law
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