In an article titled “The Great Acceleration,” McKinsey asserts that, “The COVID-19 crisis has intensified existing trends.” From remote work to digitization, we’ve seen a number of workplace trends gain steam since March 2020. Another is the movement, among courts and lawmakers, to limit the scope of non-compete agreements and other post-employment restrictions.
Non-compete agreements have been a hotly debated topic given the impact COVID-19 has had on employers (struggling with worker shortages) and employees (desiring more flexibility/mobility).
In this article, we address:
● What non-compete agreements are
● How courts interpret them
● Recent legislative/executive actions taken to limit non-competes
● Actions businesses can take in light of these developments
What is a Non-Compete Agreement?
A non-compete agreement is a contract between an employer and employee that protects an employer by preventing employees from working for competing businesses during the time period defined in the agreement.
Michigan business owners use non-compete agreements to protect trade secrets, customer relationships, and prevent employees from sharing confidential information, among other things.
Are Non-Compete Agreements Enforceable in Michigan?
Non-compete agreements are enforceable, subject to limitations, under the Michigan Antitrust Reform Act (“MARA”). Specifically, Section 445.774a of the MARA provides that an employer may utilize a non-compete agreement when it:
● protects an employer’s reasonable competitive business interests; and
● is reasonable as to its duration, geographical area, and the type of employment or line of business.
Accordingly, the key factor in determining whether a non-compete agreement in Michigan is enforceable is whether it is “reasonable.”
Courts who are tasked with determining the enforceability of a particular non-compete agreement do so by evaluating the reasonableness of the duration, geographical area, the type of employment or line of business, and other factors related to the agreement. Each case is different and requires a weighing of the relevant factors.
For example, in one case a two-year non-compete duration may hold up, whereas in another a three-month period may not. In the former scenario, the employee may be a highly compensated executive with access to customers and company trade secrets. In the latter case, the employee may be someone who has no access to competitive information and therefore restricting his employment serves no reasonable business purpose.
It’s all about balancing competing interests.
Recent Legislative/Executive Actions Taken to Limit Non-Competes
While non-compete agreements can, as set forth above, still be enforced in Michigan, there is a nationwide trend underway to limit them. States like North Dakota, Oklahoma, California and Oregon have, in recent years, severely limited the enforceability of non-compete agreements. Others, such as Virginia and Maryland, have recently banned non-competes for low-wage or hourly workers. Time will tell if Michigan follows suit, but for now the “reasonableness” factors discussed above control.
There also has been action taken at the federal level to limit non-compete agreements. On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy (“Order”), which, among other things, encourages the FTC to use its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
In addition, the Workforce Mobility Act of 2021 was introduced in the U.S. Senate, which would limit the use of non-competes to agreements signed as part of a sale of a business or a partnership dissolution or disassociation.
What Does this Mean for Michigan Employers?
There has been no recent Michigan or federal legislative, regulatory or judicial action that fundamentally changes the way non-compete agreements are evaluated and enforced in Michigan.
That being said, there is a broader trend in place—as evidenced by actions other states are taking as well as President Biden’s Order—to restrict the use of non-competes, which critics argue impede employee mobility and stifle competition.
It’s reasonable to expect, therefore, that there will be more scrutiny of restrictions on employee mobility in Michigan moving forward. Accordingly, Michigan businesses who use non competes should consider having an experienced business attorney review their agreements to evaluate whether changes are necessary in order to increase the likelihood of them being enforced. They may also want to adopt the use of agreements that achieve some of the objectives of traditional non-competes but are more narrow in scope, such as a non-solicitation agreement. A non-solicitation agreement is a less restrictive contract that is narrowly aimed at preventing an employee from soliciting their former employer’s clients. Another way employers can protect themselves is through the use of employee non-disclosure agreements, which are generally enforceable.
In sum, even if the trend toward restricting the use of non-compete agreements continues, there are still ways that businesses can protect their critical assets. If you require help in drafting employment-related agreements, or have questions about existing ones, please contact Zana Tomich.
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