It’s time for Hawaii employers to revisit their non-compete agreements. Again.
Last February the Hawaii Supreme Court invalidated an employer non-compete in part because it prohibited a real estate agent from opening her own practice, but did not also go farther and prohibit her from working as an agent for another brokerage. https://www.goodsill.com/blog/2022/02/hawaii-supreme-court-inconsistent-implementation-sinks-non-compete-enforcement-attempt-also-violation-of-non-solicitation-agreement-requires-active-initiation-of-contact/. This told Hawaii employers, if you want your non-compete to be viable, you must prohibit the employee from competing, whether as an owner or as an employee of a competing business.
Earlier this week employers got the opposite message from the General Counsel of the National Labor Relations Board: employers can potentially prohibit former employees from having an ownership interest in a competing business, but most non-competes with non-managerial, non-supervisory employees are otherwise unlawful under the National Labor Relations Act because such agreements interfere with employee rights protected by the NLRA. https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national. (Keep in mind that the NLRA does not generally protect supervisory or managerial employees. So the NRLB GC memorandum does not address non-competes with those employees. But also remember that the reach of the NLRA goes beyond union workplaces and protects non-supervisory employees even when not in a union.)
So, what about sales staff, account representatives, and other non-supervisory employees who are the face of the business with customers? These employees are often subject to non-competes, which serve to provide the business with time to put another face of the company before the customers and give that new face a chance to secure the relationship before the former employee begins to target the customers they serviced.
While the NLRB GC is not the final word on the legality of non-competes for non-supervisory employees, what this does mean is that when word of this memorandum reaches line employees who do have non-competes, there is likely to be a spate of unfair labor practice charges challenging these agreements filed with the NLRB. Expect complaints to be filed regardless of whether there are current efforts to enforce a non-compete. In the view of the NLRB GC: “Except in limited circumstances, I believe the proffer, maintenance, and enforcement of such agreements violate” the NLRA (emphasis added).
So, what should Hawaii employers be doing? It may be time to forgo the blunt instrument of a non-compete that prevents an employee from even working in competition with your business, in favor of a more targeted non-solicitation restriction. Unfortunately, in last year’s decision, the Hawaii Supreme Court also made non-solicitation provisions more difficult to enforce, confining conduct employers can prohibit as improper solicitation to instances of “active initiation of contact” with an off limits employee or, presumably, customer.
For businesses that have been relying on non-compete agreements with non-supervisory, non-management employees, to protect customer goodwill, trade secrets, training investment and other valuable company resources, now is the time to get those agreements to an employment lawyer for review and a discussion about the best way to protect those assets going forward. For businesses that have non-competes with low-wage workers who do not present a legitimate threat to unfairly take business if they depart, it is past time to be rid of those agreements.
Written by John Mackey.
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