Freedom to Work as it Affects the Employer’s Freedom to Contract
In 2017, Pennsylvania legislators proposed new bills, House Bill 1590 and House Bill 1938, seeking to reform the laws surrounding covenants not to compete. More commonly known as non-compete agreements, these documents are contracts preventing an employee from working for a competitor in a similar market after leaving a job. This issue is on the minds of Pennsylvania legislators, but other states are also considering the implications of doing away with the agreements.
The first bill, HB 1590, was proposed after recent news revealed that fast food franchises, like Jimmy John’s, had been using non-compete agreements to prevent workers from leaving their companies to work for other fast food restaurants. In fact, within Jimmy John’s franchising paperwork, the sandwich making company had been including sample non-compete agreements for its franchisees to use when hiring employees. A 2016 investigation by the New York attorney general’s office revealed negative effects of the agreements on workers’ income. Even though Jimmy John’s claimed it never enforced its non-compete agreements, the company decided to drop its sample non-competes from its franchising agreements.
Jimmy John’s may no longer officially condone non-compete agreements, but there is nothing presently stopping employers from using them in Pennsylvania, assuming they are reasonably drafted. Non-compete agreements can be helpful for employers who want to retain skilled employees at their locations, allowing the employer to save costs on re-hiring and training. Since employee turnover tends to be as fast as the food in the industry, however, low-wage workers suffer when they are unable to secure other employment relatively quickly after leaving a job. Since low-wage workers are generally not hard to hire or train, people questioned whether these agreements advance a reasonable business interest in the fast food industry.
Currently, a reasonable non-compete agreement in Pennsylvania will be narrowly tailored to suit only what the employer needs to protect its interests, provide a reasonable timeframe and territorial limit, and allow the employee to continue making a living after leaving for other employment. Employers may also include other clauses in their employment agreements preventing an employee from disclosing any trade secrets such as the names of customer loyalty program members for a relatively short amount of time within a localized area after an employee leaves. A few months and a low-mileage radius are likely the outer limits of enforceability for a low-wage job, but these outer limits increase in higher paid skilled white-collar professions.
The proposed legislation defines non-compete agreements broadly as agreements between an employer and employee designed to impede the ability of the employee to seek employment with another employer. In the case of the first bill, HB 1590, low-wage employees are defined as anyone earning 30% or more below the median wage for Pennsylvania workers or $20 or less per hour, whichever is higher. The second bill, HB 1938, does not limit its application to low-wage employees, instead it attempts to reach all non-competes except for a narrow range of special instances.
Pennsylvania courts are already hesitant to enforce non-compete agreements in general, but if either of these bills pass, it will be even more difficult for businesses to make use of these contracts. If HB 1590 passes, low-wage employers would only be able to use non-compete agreements against managers or upper-level employees earning at least $20 per hour. If HB 1938 passes, non-competes will be unenforceable except with the sales of businesses, the dissolutions of partnerships or LLCs, or agreements entered into before the passage of the bill. Such agreements would also be subject to judicial review if the employee decides to challenge the validity, so the prior restraints on time, geography, and the employee’s ability to earn a living would remain.
Fortunately for employers who use non-compete agreements today, based on the lack of success in other states and the current layout of the Pennsylvania legislature, it is unlikely that either bill will have an easy time passing. The bills have exclusive support from Democrats, and with the Republican-controlled House of Representatives, the likelihood of passage is slim. Employers are nevertheless cautioned to draft non-compete agreements carefully to ensure their enforceability under current law.
This article was written with contribution from Sarah Rothermel, 3rd year law student at Widener Law Commonwealth.