Non-Compete Discussion
Non-Compete Survey Questions were designed to determine the impact of non-compete legislation on employers and employees as well as businesses considering moving to Utah. In total, 90% of employers and 74% of employees agreed with the use of non-compete agreements. 70% of employees and 57% of employer respondents stated that the non-compete legislation that passed in 2016 Utah Post-Employment Restrictions Act would have no impact on their organization. Data showed areas of overlapping interest.
2017 Legislative Response Proponents Agreed Not to Proceed with Legislation Study Results: Confirmed the merits of our attention to this important issue for Utah s economy Demonstrated that the 2016 Non-Compete Law is working well: Struck an important balance between employer and employees Mirrored actual practice in the state Dedicated to Continuing Collaborative and Consensus-Based Approach Committed to Working with the Group and Other Stakeholders to Utilize the Research and to Build the Optimal Solution for Utah s Long-Term Health
Working Group The Working Group created in response to the Non-Compete legislation in the 2016 session, spearheaded the non-compete survey, and has continued to meet to address areas of further discussion.
Lawyer Working Group Comprised of Attorneys from the Labor & Employment Section of the Utah Bar Equally Weighted Group Represent Both Employees and Employers Several Participated in Focus Group Tasked to Draft Conceptual Language for Constructive Dialogue Overall Goals Transparency Ensuring that Legislation Considers Legal Landscape/Practical Realities Discussion Developed In Advance of any future Legislative Session Stakeholder Input End uncertainty by reaching a conclusion to this topic if possible
Areas for consideration Notice Low Wage Employee Goodwill Termination
Notice
NOTICE DATA POINTS 74% of employers reported they inform employees of a non-compete at time of job offer and before the offer is accepted. 25% of employees reported they were notified, after they had accepted an offer, but before the first day that they would have to sign a non-compete. 24% of employees reported they were informed on their first day of work that they would be required to sign a non-compete. 61% of employers reported that they notify an employee that they have signed a non-compete at time of departure. 66% of employees reported that they were not given notice or a reminder before they had left the company that they had signed a non-compete.
Employees indicate they are asked to sign non-compete agreements later than what is indicated by Employers. Timing of Signing Non-Compete Agreement n= 455 595 Before Signing NCA While Signing NCA After Signing NCA % Selected Employer Employee At the time of job offer and before the offer is accepted 19% 74% Before accepting offer After the employee accepts the job offer but before the first day of work After offering a promotion or a new role or responsibilities 15% 10% 4% 25% After accepting offer The first day on the job When the company ownership structure changes After the first day on the job 6% 3% 7% 1% 10% 24% 42% of employees report that they could not have consulted with an attorney before signing their most recent non-compete agreement. It should be a discussion before the employee accepts the offer. If the employee has already quit the last job and is showing up in the new job, and then is told to sign the non-compete agreement, he has no choice. - Employer If I had received the non-compete agreement with the job offer, I think I would have explored other opportunities before committing to the agreement. - Employee 9 Employer 4-7 Please indicate at what point you inform individuals that they will be asked to sign a non-compete agreement. Employee 4-11 With your most recent non-compete agreement, please indicate when you were given a copy of the non-compete agreement.
NOTICE Conceptual Language Prospective Employee Notice that employer will require a non-compete agreement must be provided in writing Acceptable Forms: letter, email, text Required Content: Clear and conspicuous language that the notice relates to a non-compete Specific terms (i.e. duration, geography, scope) Timing: Delivered near or at the time the employer provides applicant/potential employee with an offer of wages/salary or the terms of the wages/salary
NOTICE Conceptual Language Current Employee If the employee is already working (employed) and the employer wishes to have the employee sign a non-compete, the employer must: Provide the agreement terms in writing Give at least one week's notice before requiring assent by employee Could consider requiring employer to offer additional consideration in this circumstance beyond continued at-will employment. Such additional consideration could be defined as something equal to or greater than [AMOUNT], expressed in dollars, a percentage of the person s annual income, a promotion, or less defined with reliance on common law
Low Wage Employee
Employers and Employees have varied perspectives on levels of employment where non-compete agreements are appropriate. Opinion on Use of Non-Compete Agreements by Employee Type n= 937 2000 Employer Employee % Selected Hourly - Non-Management Salary - Non-Management Hourly - Mid-Level Management Salary - Mid-Level Management 21% 15% 33% 20% 32% 22% 37% 50% Level of employee comes into play. Entry level or junior level employees who just started their career should not be treated the same as senior managers who spearhead the project. Also, it is in a much fairer spot for an executive to negotiate the terms and make sure it is fair to him than it is for a junior level person [the employee] does not understand what is fair or not fair, and does not know what he should argue for or not argue for. - Employer Hourly - Professional Role 39% 27% Salary - Professional Role Sales Role Senior executive positions C -level executives Any employee which has received significant investment Any employee that has access to proprietary information All employees None of the Above 59% 44% 55% 31% 50% 52% 66% 70% 63% 41% [VALUE] 53% 19% 11% [VALUE] 26% The problem that needs to be solved is it is standard practice for everyone to sign a non-compete agreement, whether it s appropriate or not. Many employees are not privy to trade secrets or IP, like myself. Yet I'm restricted from finding another job that might be better for me. There are times when it is absolutely appropriate, but right now the non-compete agreement is the default or status quo. - Employee It makes sense for a manager, engineer, or your sales employees that have relationships with clients to sign a non-compete agreement. It seems common sense to have something to protect your business, but if it s a blanket agreement on everyone it loses its meaning and has a negative effect. - Employee 13 Employer 3-5 In your opinion, from which types of employees is it appropriate to require non-compete agreements in Utah? Employee 3-5 In your opinion, from which types of employees is it appropriate to require non-compete agreements in Utah?
Employees with high incomes are more likely to have signed a non-compete agreement. Non-Compete Agreements by Employee Income Level 40% 33% 26% 14% 17% 8% 10% Less than $15,000 $15,000 to $24,999 $25,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999 $100,000 to $149,999 More than $150,000 11 of 136 21 of 213 86 of 611 75 of 439 73 of 282 63 of 192 23 of 58 14 Employee 7-6 Which of the following best describes your current personal, gross annual income from employment? Employee 4-3 With which of the following employers have you signed a non-compete agreement?
Employers and Employees support different legislative approaches to non-compete agreements. Support for Other State Non-Compete Agreements Legislation n= 937 2000 Employer Support Neutral Oppose Employee Prior Utah law, and the law in the majority of states, allows courts to determine the reasonableness of the scope and duration of a noncompete agreement based on the individual circumstances of each agreement and employment situation 10% 16% 74% 14% 27% 59% In non trade secret cases, Florida courts presume non-compete agreements of more than 2 years are unreasonable 17% 17% 65% 11% 21% 67% In cases involving trade secrets, Florida courts presume noncompete agreements of 5 years or less are reasonable 27% 15% 57% 44% 23% 33% Illinois prohibits non-compete agreements for employees earning $13 an hour or less 24% 21% 55% 12% 21% 68% California bans all non-compete agreements 75% 12% 13% 35% 28% 38% 15 Employer 6-11 Please indicate the extent to which you oppose/support the following approaches to non-compete agreement laws Employee 6-8 Please indicate the extent to which you oppose/support the following approaches to non-compete agreement laws
LOW WAGE EMPLOYEE - Conceptual Language Option 1: Post-employment restrictive covenants are invalid and not enforceable against low- wage earners. Low-wage earners defined as: employees paid less than the equivalent of the salary threshold established pursuant to the Fair Labor Standards Act for exempt employees, which is $11.38 per hour.
LOW WAGE EMPLOYEE - Conceptual Language Option 2: Slide 1 Post-employment restrictive covenants are presumptively invalid and not enforceable against: an employee who earns equal to or less than the median household income for Utah as established by the US Census (latest is 2015), which equates to $30.24 per hour, or $62,912 annually. If you d rather have this number keep up with rising incomes, then it could say that median household income would be based on Utah data as established by the US Census for the most recent year available at the time that the employee signed the noncompete
LOW WAGE EMPLOYEE - Conceptual Language Option 2: Slide 2 Presumption may be rebutted if the employer establishes that the low-wage earner has: material access to or knowledge of trade secrets, confidential and proprietary information and processes critical to the operations or business strategies of the employer, customer lists and non-public pricing information; or material relationships with a significant number of the employer s customers; or that another legitimate business interest supports the existence of a post-employment restrictive covenant. The presumption language or safety-valve framework could be used with both Options 1 and 2.
Goodwill
Both Employers and Employees agree that non-compete agreements protect a companies intellectual property and other sensitive information. Opinions Regarding Non-Compete Agreements n= 937 2000 Agree Disagree Employer Employee Level of Agreement Non-compete agreements protect company intellectual property, processes, internal knowledge, and investments in employees Non-compete agreements protect companies and their employees from competition from departing employees and competitors who hire them Employees with access to trade secret information or specialized training are more frequently targeted for recruitment Non-compete agreements are necessary to prevent former employees from giving proprietary information about their previous company to a competitor Disagree 9% 10% 10% 15% 5% 11% 12% 20% Agree 83% 72% 78% 64% 78% 60% 77% 60% It does get tricky when we talk about protecting a company s data. I don t really know what the answer is, but I don t like the idea that employers can prevent employees from working out of fear that they might use company information. Companies have a right to protect certain types of information and the information that belongs to companies should be protected, but the mechanism of using a non-compete agreement doesn t feel right. - Employee Employees hired by direct competitors often share proprietary information from their former company with their new employers Newly hired employees often divulge trade secrets of their former employers in exchange for large signing bonuses or higher salaries Former employees can be trusted not to share with competitors their former company s proprietary information 71% 10% 22% 31% 35% 41% 13% 49% 37% 30% 30% 76% Apart from the IP and technology, it also protects company secrets. We figured it out ourselves, we don t want others to know it. - Employer Employee 3-7/ 3-8 Please indicate the extent to which you agree with the following statements Employer 3-7/ 3-8 Please indicate the extent to which you agree with the following statements 2
There is some overlap in the degree to which Employers and Employees say non-competes can have both positive and negative effects. Opinions Regarding Non-Compete Agreements n= 937 2000 Agree Disagree Employer Employee Level of Agreement Non-compete agreements encourage company investment in training, developing, and sharing information with its employees An employer who makes a significant investment in the image, brand, customer relationships, training, or specialized skillset of an employee owns the corresponding investment (sometimes termed goodwill) and should be entitled to recoup that investment Disagree 14% 17% 17% 28% Agree 69% 53% 65% 42% I don't feel like my agreement ever kept me from generating ideas or seeking new business opportunities. - Employee We trained our salesman and we taught them everything. We helped them develop great relationships with other companies and we gave them a lot of education. We make them more marketable, so in return, we get protection for short period of time. - Employer Non-compete agreements allow employers to pay less compensation because an employee s ability to depart is restricted 64% 61% 26% 17% 14% 46% I think they hurt innovation. They inhibit competition from an entrepreneurial standpoint. Silicon Valley is always looked at in arguments around noncompete agreements. If Utah wants to be Silicon Valley then not having employment restrictions would allow that type of innovation to flourish. Non-compete agreements inhibit innovation 36% 28% - Employee Employee 3-7/ 3-8 Please indicate the extent to which you agree with the following statements Employer 3-7/ 3-8 Please indicate the extent to which you agree with the following statements 2
Non-compete agreements are used by Employers to protect trade secrets and valuable company information. Employers Value in Using Non-Compete Agreements n= 455 % Employers Protect company's trade secrets and proprietary information 84% Protects existing customer relationships Prevents competitors from hiring employees with valuable company information 69% 67% Non-compete agreements encourage employee buy-in and enhance loyalty. The employee knows beforehand that I need to protect the company and that I am here longterm. The agreement makes them think about that. - Employer Protects investment in training or professional development 66% Protects company s goodwill Fosters information sharing with employees 38% 55% I hire employees and train them, we introduce them to our clients and help them develop relationships. Ultimately, I am more concerned about protecting business relationships and that is why we use non-compete agreements. - Employer Protects employee turnover 28% Reduces labor costs 9% 22 Employer 5-1 What value does your company find in asking employees to sign non-compete agreements?
Employers utilize non-compete agreements to protect proprietary information as they are seen as more enforceable than a non-disclosure agreement. Employers Value in Using Non-Compete Agreements Protect company's trade secrets and proprietary information Protects existing customer relationships Protects company s goodwill Protects employee turnover Fosters information sharing with employees Prevents competitors from hiring employees with valuable company information Protects investment in training or professional development Total n= 455 2-9 n= 91 10-19 n= 66 20-49 n= 82 50-99 n= 71 100-249 n= 55 250-499 n= 36 500-999 n= 26 1,000-2,499 n= 17 84% 87% 82% 82% 82% 87% 83% 81% 94% 82% 69% 64% 77% 73% 66% 69% 58% 77% 65% 73% 67% 59% 65% 71% 72% 73% 56% 69% 76% 64% 66% 74% 68% 63% 55% 64% 64% 81% 65% 64% 55% 53% 62% 56% 54% 55% 61% 50% 59% 36% 38% 35% 50% 44% 37% 36% 25% 27% 35% 27% 28% 25% 42% 22% 31% 25% 31% 15% 24% 18% 2,500+ n= 11 Reduces labor costs 9% 10% 14% 5% 11% 5% 11% 8% 12% 0% >81% 61-80% 41-60% 21-40% <20% Employer 5-1 What value does your company find in asking employees to sign non-compete agreements? 23
Some Attorneys feel the term goodwill needs to be more clearly defined to provide clarity and to prevent overly broad application. Common Themes on Goodwill: Goodwill is an integral part of a company s intangible assets and needs to be protected - The compilation of information and relationships which provide a competitive advantage to the company and which was developed at company expense over a period of time. We do not have a lot of guidance on what goodwill means. I think you can make a good faith argument that all those things are goodwill but we certainly don t have the case law to support all these to be a part of the non-compete agreement. - Attorney Common Concerns about Goodwill: Definition of goodwill is not clearly defined in case law Companies use the term goodwill too broadly as a mechanism to justify non-compete agreements There is disagreement about whether an employer or employee owns the goodwill Suggested Solutions: Consider tighten the definition of goodwill so that it specifically covers: - Customer/Client exposure - Customer needs and strategy - Training - Access to business methodologies (public or non-public) - Reputation - Business relationships (e.g., vendor relationships, referral relationships, repeat business) - Personal brand (e.g., broadcasting industry) It (goodwill) is a big bag of information. It would be different for each employer and different for each industry. - Attorney 24 24
GOOD WILL - Conceptual Language Definition - Option 1: Goodwill means intangible assets of an employer, including but not limited to, preexisting customer or client relationships arising from a continuous course of business, brand recognition, company image or reputation, specialized skillset, market position, customer trust, and similar assets associated with the employer created while the employee was employed by the employer.
GOOD WILL - Conceptual Language Definition - Option 2: Goodwill means intangible assets of an employer, including but not limited to, preexisting customer or client relationships arising from a continuous course of business, brand recognition, company image or reputation, market position, customer trust, and similar assets associated with the employer created while the employee was employed by the employer. Goodwill does not include: the personal goodwill generated by or from an employee s individual skills, knowledge, experience, relationships, and reputation. Carve-out language was not vetted by the attorney group Changes: Removes phrase specialized skillset Creates carve-out for individual or Godgiven talents
Termination Without Cause
R. GREENE S PROPOSAL Post-employment restrictive covenants shall not be enforceable against employees if, without cause, the employer terminates the employment of the employee within six months of the date on which the employee executes the post-employment restrictive covenant. The attorney working group could not come to any potential consensus or language on this proposal and the attorney working group did not vet the above language.
Open Discussion