Published in Small Business

Legislation to limit non-competes for certain low-wage jobs draws concern from biz groups

BY Sunday, February 02, 2020 05:15pm

Backers of legislation that would bar employers in Michigan from requiring certain employees to sign a non-compete agreement say they simply want the free market to work.

In the case of their legislation pending in Lansing, that means prohibiting the use of non-compete agreements that prevent workers from going to work for a competitor, an employer in the same industry, or perhaps starting their own business within the same market or industry. The bill under consideration would better define and limit the use of non-compete agreements, and require employers using them to inform people up front before they are hired.

Left: State Rep. Mari Manoogian, right: Wendy Block, vice president of business advocacy for the Michigan Chamber COURTESY PHOTO

“Non-competes are inherently non-competitive and contrary to most American concepts of a free market and free competition,” David Blanchard, an employment attorney with Blanchard & Walker PLLC in Ann Arbor, told legislators during a recent committee hearing on the bill.

Blanchard has represented clients who were hired and then told the first day on the job they had to sign a non-compete agreement, “and sometimes they didn’t even realize what they were signing until years later when the issue comes up” after they move on to a better job or start their own small businesses.

The legislation as written would affect minors and low-wage earners, such as a family of three with a household income below 138 percent of the federal poverty level, or $27,579 per year presently.

State Rep. Mari Manoogian, D-Birmingham, cited the fast-food and food-service industries as sectors that use non-compete agreements to limit where employees can go to work after leaving a job.

Manoogian specifically pointed to Jimmy John’s sandwich shops, which halted the use of non-compete agreements in 2016 to settle litigation brought by attorneys general in several states. Previously, Jimmy John’s had employees sign an agreement that barred them from working for two years or within three miles of a franchise location at another company that generated more than 10 percent of its revenue from the sale of sandwiches.

Manoogian called her legislation “common sense reforms to ensure that we, as a state, are truly a land of economic opportunity and a place where an individual actually has the freedom to work.” 

Ensuring fair use

Non-compete agreements are proper for many professions, but not for low-wage workers in food, service, retail or other jobs, Manoogian said. The use of the agreements has “been abused far beyond their purposes,” she added, citing cases in which employees are barred from leaving a job to start their own business.

“That costs our economy and it goes against the basic principles that every Michigander deserves the freedom to pursue economic opportunity,” Manoogian said. “If we want our state to be able to compete in this ever-changing economy, we need to ensure that our workers can start businesses without being bound by unreasonable employment agreements.”

Manoogian and other backers of the bill are not seeking a complete ban on non-compete agreements.

Under the proposed legislation, employers could still use the agreements to prevent client-poaching, and to protect proprietary information and intellectual property, “and I completely understand that,” Manoogian said.

“The objective of this legislation is not to end all non-compete agreements, but just to ensure that they are used fairly,” she said. “There are absolutely instances where non-compete agreements are justified, but I think we can all find consensus that the use of these agreements for low-wage workers and entry-level employees is just not appropriate.”

The bill would retain a provision in present state law that allows an employer to obtain an agreement from an employee “that protects its reasonable competitive business interests,” according to a House Fiscal Agency analysis.

The bill before the House Commerce & Tourism Committee would prohibit an employer from requiring or imposing a non-compete agreement for low-wage earners paid less than 138 percent of the federal poverty level, a threshold the state used years ago for Medicaid expansion.

Under the bill, employers using non-compete agreements that have been allowed in Michigan since 1985 would have to provide job applicants written notice of the requirement, disclose its terms in writing prior to hiring an employee, and post the law or a summary in “a conspicuous place at the worksite where it is accessible to employees.”

Differing views

Opposition to the legislation during the recent committee hearing came from the Michigan Chamber of Commerce, which considers the bill overly broad as written.

“It doesn’t take into account types of employees who might be subject to a non-compete agreement, regardless of their wage or income. It doesn’t take into account things like the access to proprietary information, or access to trade secrets, or other competitive information that might require the employer to take a non-compete on that employee,” said Wendy Block, vice president of business advocacy for the Michigan Chamber. “Access to this sort of information is not limited by income and it’s going to vary industry to industry, person to person, and that’s why we support continuing to allow this to be dealt with as it has for the last 30 years.”

Block noted that the Michigan Chamber generally does not support “one size fits all” approaches. Nor does it support the use of non-competes in cases such as Jimmy John’s.

“It is ridiculous. It shouldn’t have been allowed to happen,” she said. “But the fact of the matter is it’s done and settled. It’s behind us.”

The Small Business Association of Michigan and Associated Builders and Contractors of Michigan also oppose the legislation, but did not testify at the recent committee hearing.

Supporters included the Michigan League for Public Policy and Gov. Gretchen Whitmer’s administration.

“We believe that this bill is good for working families, that it’s fair, and it does not impair an employer’s ability to protect their legitimate business interests, which non-competes are originally designed to do,” said Sean Egan, deputy director of the Michigan Department of Labor and Economic Opportunity.

Employers can use “other tools” such as confidentiality agreements and non-solicitation agreements to protect customer lists, sales data, intellectual property and other sensitive information when employees leave for another job, Egan said.

Avoiding exposure

However, non-competes are not easily separated from non-disclosure agreements, Block said. Michigan Chamber members have indicated the two agreements are used together most of the time, she said.

“By separating those out and not allowing them to be used comprehensively, it does create exposure for the employer,” Block said. “There does seem to be some holes there if you say you can use one but not the other.”

Employers have long used non-compete and non-disclosure agreements to protect trade secrets and technology, copyrights, intellectual property, patents and other confidential information, Block said.

Two states, California and North Dakota, prohibit non-compete agreements, while most other states recognize them in some form, Block said.

Existing state law has allowed their use to “protect reasonable competitive business interests” in cases when the specified duration, geographic area, type of employment and line of business in which an employee seeks to move is “reasonable,” she said.

In cases where non-compete agreements were challenged, courts in Michigan consistently have penalized employers who use “overly broad non-compete agreements,” Block said. The Michigan Chamber supports continuing to have non-competes dealt with on a case-by-case basis where courts determine if they are unreasonable under the present law.

However, not everyone can mount that kind of legal challenge, according to advocates of the legislation.

Low-wage workers generally are unable to afford an attorney to go to court to invalidate a non-compete agreement, said Blanchard, who testified in support of the bill on behalf of the Michigan Association for Justice, where he serves on the executive board.

“For low-wage workers, that’s just an impossible task. They can’t afford it, nor does their income level justify investing in a court legal process to determine whether they can work at the sandwich shop across town or down the block,” he said.

Many workers also “generally are rule followers” and won’t challenge a non-compete anyway, Blanchard said.

Growing prevalence

A December report from the Washington, D.C.-based Economic Policy Institute detailed the growing use of non-compete agreements nationally. The non-partisan think tank conducted a random survey between March and July 2017 that drew responses from 634 employers.

Nearly half of the survey’s respondents said that “at least some employees in their establishment were required to enter into a non-compete agreement.” Nearly one in three reported that all employees needed to sign a non-compete.

In Michigan, nearly 38 percent of the 29 companies that responded to the Economic Policy Institute survey said all employees had to sign a non-compete.

The Economic Policy Institute noted the national findings compare to a 2015 report by University of Michigan researchers who surveyed more than 11,500 workers. At the time, about 18 percent reported they were bound by a non-compete agreement.

“While establishments with high pay or high levels of education are generally more likely to use non-compete agreements, non-competes also are common in workplaces with low pay and where workers have low education credentials,” according to the Economic Policy Institute report.

The use of non-compete agreements for all employees ranged from 36.5 percent for positions paying $22.50 per hour or more, to 29 percent for jobs paying $13 an hour or less, according to the Economic Policy Institute. 

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