There is a substantial amount of paperwork involved in the on-boarding process for a new employee. One of the documents that a new employee may be asked to sign is a

The Nature of Non-Compete Agreements

In Michigan, a non-compete agreement is only enforceable in a court of law if it is reasonable. This requirement has been upheld in numerous court cases including Innovation Ventures LLC v. Liquid Manufacturing LLC, in which the Michigan Supreme Court held that a noncompete provision must be evaluated for reasonableness.

To determine whether a statement is reasonable, there are several elements that a court will consider:

• The type of business, industry, or position involved. This category involves the type of activity that the worker is prohibited from doing. A reasonable noncompete agreement might limit a former worker from working in a small niche within a company. A noncompete agreement that prohibits a worker from functioning in an industry in any degree, however, would likely be found unreasonable.
• The duration of the non-compete term the worker must follow. An agreement will be found unreasonable if it prohibits a worker from being employed for too long a period of time. For example, a noncompete agreement that restrict a worker from being employed for 10 years would likely be found unreasonable, but a one-year restriction is often found to be reasonable.
• The geographic location mentioned in the agreement. Noncompete agreements are often found to be unreasonable if they prohibit a worker from being employed in too large an area. While a noncompete agreement that prohibits a person from working in the United States would likely be found unreasonable, an agreement that prohibited a worker from being employed in a several mile radius would likely be found reasonable.
• The business interest that the agreement seeks to protect. This factor refers to a specific advantage that the worker might be able to use in competition against a former employer. Noncompete agreements must specify about what exact unfair advantage is involved. For example, an unfair advantage might include awareness of confidential information, knowledge of a customer base, and unique training.

It should be noted that this reasonableness standard only applies to employee noncompete agreements. Commercial non compete agreements follow a different standard. In either case, to make sure that a non-compete agreement is reasonable, it is often a wise idea to speak with a knowledgeable lawyer.

Speak with an Experienced Bankruptcy Law Attorney

If you are a worker who is attempting to challenging a non-compete agreement or a business founder seeking to craft an enforceable non-compete, an experienced corporate law attorney can help. Contact the Resnick Law, PC today to schedule an initial free case evaluation.

(image courtesy of Marten Bjork)

Jagadeesh Sivadasan, an associate professor of business economics and public policy at the University of Michigan’s Ross School of Business, compared data for workers in states that strongly enforce non-compete clauses with those that do not.

“Companies use non-compete agreements to protect their intellectual capital, but we find statistically significant effects for lower wages and lower mobility, meaning they stay in a given job longer,” Sivadasan wrote on the U-M news website.

Sivadasan and his co-authors — Ross doctoral student Jin Woo Chang, Natarajan Balasubramanian of Syracuse University, Mariko Sakakibara of UCLA and Evan Starr of the University of Maryland — focused on tech workers because of the prevalence of non-competes in that industry.

They analyzed individual worker-level data from the U.S. Census Bureau, which collects it from states. They then ranked each state according to how strongly it enforces non-compete agreements, drawing on work by Norman Bishara, U-M professor of business law and ethics. California, for example, doesn’t enforce them at all, while Florida’s state law is more generous for employers.

For example, if a non-enforcing state such as California were to enforce non-competes to the maximum level of Florida, tech job earnings would be 2.5 percent to 3.5 percent lower.

Sivadasan and colleagues found a similar effect for mobility. If California started enforcing non-competes like Florida, the average length of a tech job stay would increase by 7.5 percent, compared to the average length of a non-tech job.

“This provides strong evidence that non-compete enforcement locks employees into their jobs, with little evidence that any productivity benefits are shared with the employees,” he said.

As Washington debates the repeal of the Affordable Care Act and its broader implications of keeping people locked into jobs, a similar discussion on how non-competes affect dynamism in the labor market — that is, how much workers move around and how many jobs are created and destroyed — seems to echo similar sentiments. Data suggests dynamism has slowed down and that non-compete agreements are a policy governments can influence according to how much or little enforcement a state offers.

“We can’t make the correlation that dynamism is slower because companies are using non-competes more aggressively, but we can say they slow mobility for the highest-value knowledge workers,” Sivadasan wrote. “If the government wants to promote mobility, then our research suggests that one policy lever it can use is to limit enforcement of non-competes.”

Legal opinions vary as much as the patchwork of state laws governing them. Some argue non-compete agreements — which limit when and how a departing employee can work for a competitor — unfairly inhibit worker mobility and innovation.

Others say companies are more willing to invest in people when assured they won’t skip right over to the competition. This disagreement over the impact of non-competes has led to intense and ongoing debates about reforms to non-compete policy in several states.