From manicurists at your local salon to med-tech engineers to company CEOs, workers up and down the economic ladder are increasingly being required to sign noncompetition agreements (or “non-competes”) as a condition of their employment. Despite an historically tight labor market, few but the highest compensated workers in Minnesota, with the most prized skills, have the leverage to reject such agreements outright, or even negotiate their terms. Through years of practicing employment law, I’ve come to see that our system is rife with abuse, tethering many employees to unsatisfying jobs. This article will explain the problem and propose some common sense solutions.
Under existing Minnesota law, developed entirely by the courts and not the legislature, non-competes are permitted to limit not ALL competition, just unfair competition. They do this two ways: (1) by restricting the use by departing employees of employer trade secrets and confidential information (such as pricing information, customer lists, business plans, algorithms, product designs and processes); and (2) by prohibiting the diversion of customers and business relations. Non-competes are legally disfavored, and are only enforceable to the extent reasonably necessary to protect a legitimate business interest. Courts measure non-competes’ reasonableness in geographic and temporal scope, i.e. time and distance, and have upheld ones as long two years — longer if connected to the sale of a business — and as broad as the entire country. Judges determine appropriateness on a case-by-case, industry-by-industry basis, and have the discretion to modify overly broad non-competes. Related to non-competes are non-solicitation agreements, typically applied to sales positions, which specifically prohibit the poaching of customers.
Minnesota’s public policy favors employee mobility and the freedom to contract. Experience, sadly, tells another story. In our increasingly specialized workforce, the only opportunities for many skilled but lower compensated employees are with competitors of their employer. Employees earning a modest income should not have to choose between sticking with a bad job and packing their bags, selling their house and moving out of state. Even the threat of a lawsuit may deter some from quitting, particularly in the face of one-sided non-competes requiring the employee pay the employer’s legal expenses, often well in excess of the employer’s actual monetary damages, in the event the employer sues and prevails at trial. Existing law appears to permit such “heads I win, tails you lose” contracts. Moreover, none but the highest compensated employees are financially equipped to respond to an employer’s suit, whose cost to defend can measure in the tens of thousands of dollars. Worse, some employers sue departing employees not out of any legitimate business concern, but to send a message to the rest of the workforce. Finally, non-competes are ill-suited to, but common in industries where the customer relationship is personal in nature. Examples include hair stylists, manicurists, massage therapists, and health care providers. When Ellen learns her longstanding stylist Jeffrey has departed Salon A for Salon B across town, and then learns Jeffrey is contractually barred from cutting her hair for two years, how likely is she to return to Salon A? Which forced him to sign the contract? I submit that such non-competes advance no legitimate purpose, but are designed solely to prevent employees from changing jobs. And suppress wages.
Well-funded industry groups will no doubt oppose even modest proposals for reform. My two-word response is “Silicon Valley.” California famously prohibits non-competes by statute (as does, incidentally, über liberal North Dakota). Yet tech giants such as Apple, Google, Facebook, Intel, HP, Cisco, Oracle and others continue to prosper and grow their operations in the Golden State.
The legislative fix that I am proposing could be called the “Minnesota Freedom to Work Act,” and might include the following elements, among others:
(1) No non-compete or non-solicitation agreement shall be legally enforceable against any employee who earns less than $40,000 per year.
(2) No contractual provision awarding attorney fees to an employer who successfully sues to enforce the terms of a non-compete or non-solicitation agreement shall be legally enforceable unless the agreement contains a reciprocal provision awarding attorney fees to any employee who is successful in defending a lawsuit brought by an employer concerning a non-compete.
(3) No non-compete shall be legally enforceable against an employee who is involuntarily separated from employment within his/her first two years of employment. No non-solicitation agreement shall be legally enforceable against an employee who is involuntarily terminated from employment within his/her first year of employment.
(4) For employees employed within Minnesota, no contractual choice of law provision purporting to apply another state’s law to a contract of employment shall be enforceable, unless such state’s law is more favorable to the employee than Minnesota’s law.
(5) Any employer with 20 or more employees or $5,000,000 in annual revenues [other numbers could be used] must continue to pay a departing employee’s wages for each week the employee abides by the terms of his/her non-compete, with a dollar for dollar offset for wages earned from employment not in violation of the non-compete. Salary continuation shall be at the greater of the employee’s rate of pay at the time of separation, or the average salary over the preceding two years.
(6) No non-compete shall be legally binding on a nail technician, hairstylist or massage therapist. Others on the list may include counselors, personal trainers, physicians, dentists and psychoanalysts. (Lawyers in Minnesota need no such protection. Their Rules of Professional Conduct expressly prohibit non-competes.)
The legislative fixes I’m proposing promise to help bring justice and fairness to the workplace at no appreciable cost to our economy.