Sen. Ford has introduced SB 348 concerning covenants not to compete. It prohibits an employer from requiring an employee or prospective employee from entering into a covenant not to compete if the employee’s earnings don’t exceed $15 per hour. A covenant not to compete is one that restricts the employee from working for another employer for a specified time and/or in a similar field or from working in a particular geographic area. It declares such contractual provisions as void and against public policy.
I think this is a good concept. Courts are generally pretty skeptical of covenants not to compete as it is — restricting a person’s ability to work is not something they’re very comfortable with. There are some legitimate business reasons for a covenant not to compete – the employer has given the employee valuable training or contacts or information and the employee should not be able to profit off of those inputs at the employer’s expense. But, if the training or information or other inputs with which the employer has entrusted the employee are so valuable, it stands to reason that the employer would be compensating the employee accordingly. If the employee is making less than $15 per hour, it stands to reason that a covenant not to compete isn’t protecting the employer’s legitimate business interests so much as it’s being used as a tool to gain additional leverage over the employee.
The General Assembly might, however, look at tightening up the “earning $15 per hour” language. Compensation models that involve commissions or tips or irregular bonuses could complicate things somewhat. Courts could probably figure it out, but some additional attention might make it harder for employers to find work-arounds.
I know I’m swimming upstream in the Indiana business community when I say this, but the best thing Indiana could do for it’s economy would be to eliminate most non-compete agreements.
I worked for a long time in California, in an industry where trade secrets and intellectual property were central to our business. The fact that most non-competes in California are unenforceable forces businesses to treat their employees with respect and to compensate them well. Big tech firms don’t offer good wages, stock options, chef made meals, beer on premises and all the other luxury amenities out of the goodness of their hearts or to be cool, they do it because they have to in order to keep their good people. And when companies in California are not able to keep good people, those talented folks go out and start their own businesses.
This results in a business environment that both rewards employees and provides incentives for them to start new businesses. And it’s the new businesses that generate job growth, not the large, established ones.
If you sit in on a planning session at an old established business, one of their key focus areas is always reducing labor. If you sit in on a planning meeting at a startup, on of the key focus areas is how fast new talent can be recruited and integrated into the business.
It’s not complicated.