A non-compete clause, or covenant not to compete, in an employment contract is used to prevent an employee from leaving and going to work for the employer’s competition. Employers argue that these non-compete clauses are necessary to protect their trade secrets, client lists, and procedures and processes. Also, employers argue that the non-compete protects their investment of time and resources used in training the employee. Employees argue that it prevents them from finding suitable work and artificially applies downward pressure on wages.
For a very long-time courts have not favored non-compete clauses and strictly construed them against the employer. Until recently, when determining if a non-compete agreement was enforceable, the court would look at (1) whether it was reasonably necessary to protect the employer’s interest, (2) if it restricted the employees job prospects for too long a period, and (3) if it restricted the employee from seeking employment over a larger than necessary geographical region.
Originally, most non-compete clauses were used with highly compensated employees with very special skill sets, or salesmen that had access to valuable client lists. As an employer, you do not want your highly compensated employee with critical, sensitive information leaving you on Friday and starting work with your direct competitor on Monday. However, over time, large employers took advantage of the non-compete clauses and started enforcing them against their rank-and-file, low-wage employees. Across the United States mega corporations would force their cashiers, janitors, and cooks to sign non-compete agreements, or even worse, bury it deep in boiler plate legal ease that entry level employees do not read.
Now, instead of a sophisticated businessman that had a lawyer negotiate his non-compete for additional compensation; we have millions of low-wage workers being forced out of the labor market because they had previously mopped a floor for a huge corporation. Many states took notice of this obvious injustice and began filing lawsuits against the big companies that were taking advantage of their employees.
While these mega corporations tricked (at least) thousands of low-wage workers into signing non-compete agreements that most courts would not enforce, it still caused serious problems for the workers. Even if a worker went to court over the non-compete, and was expected to win, it could still cost him or her thousands of dollars in attorney’s fees. In many cases, the mere threat of litigation from a huge company caused the worker to just drop out of the labor market. States across the U.S. have been passing laws to restrict the use of non-compete agreements.
Last year, in 2020, the Virginia General Assembly passed a law that made it illegal for an employer to enforce a non-compete agreement against an employee that earned less than the average Virginian worker, or as they phrase it, a “low-wage employee.” The average wage changes from year to year but recently it has been hovering between $60,000 to $65,000.00. There are some exceptions for employees that earn primarily commissions or bonuses.
Virginia Code section 40.1-28.7:8. Covenants not to compete prohibited as to low-wage employees; civil penalty states, in part:
- As used in this section:
“Covenant not to compete” means a covenant or agreement, including a provision of a contract of employment, between and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with his former employer . . .
“Low-wage employee” means an employee whose average weekly earnings . . . are less than the average weekly wage of the Commonwealth . . .
- No employer shall enter into, enforce, or threaten to enforce a covenant not to compete with any low-wage employee.
- Nothing in this section shall serve to limit the creation or application of non-disclosure agreements intended to prohibit the taking, misappropriating, threating to misappropriate, or sharing of certain information, including trade secrets . . .
The Virginia Code goes on to clarify that the employee has two years after certain activities to bring a suit against the employer. Also, there is a $10,000.00 civil penalty for an employer who violates this law. So, if you make less than the average Virginian employee, and are not commission based, then, for the most part, you no longer have be concerned with non-compete clauses. It seems that low-wage employees must still honor non-disclosure agreements.
Non-compete agreements are frequently used in the sale of a businesses. Typically, the seller of the business will sign a non-compete with the buyer of the business to assure the buyer that the seller will not open a new shop near the one he just sold. This makes perfect sense because one of the things you are buying is the seller’s “good will” and customer base. The buyer of the business would be in a very bad position if the seller called all his former employees and clients the day after the sale and set up a new shop down the block. It is unlikely that this new law would end the practice of placing non-compete clauses in the Sale of Business contracts.
Virginian employees that earn above the average wage must still be concerned with non-compete agreements. However, even with high-earners, employers still need to make sure that the non-compete is only as restrictive as it reasonably needs to be to protect the employer’s legitimate business interests. The non-compete should not cover a geographic region larger than what is necessary to protect the employer, and in most cases, the non-compete should not last more than two years. Some states, not Virginia, are passing laws that limit the non-compete to one year or less.
Most of the time the Virginia General Assembly does a terrible job with drafting new laws. However, in this case, they have done the right thing. There is a legitimate business interest in using non-compete clauses with highly compensated, sophisticated, employees that have specialized knowledge. However, there is no reason whatsoever to enforce a non-compete clause against a burger flipper, a sandwich maker, or janitor. If an employee is so valuable and their skillset is so specialized that the employer entrusted them with critical data, then that employee should not be paid below the median income for the state. It makes perfect sense for the General Assembly to prohibit the enforcement of non-compete clauses against “low-wage” employees.
Virginian employers should consider redrafting their non-compete clauses and look very closely at an employee’s compensation before threatening to enforce a non-compete agreement. Virginian employees, especially highly compensated ones, should consult with an attorney before signing an employment contract with a non-compete clause. Sometimes an employer is not willing to negotiate with a would-be employee over a non-compete. But, in some cases, depending on your special circumstances, an employer may be willing to narrow the scope of the non-compete clause. Either way, having an attorney discuss with you the possible consequences of signing the non-compete agreement may be helpful.