In representing low wage workers, we have noticed in the last few years the overuse of noncompete agreements in Wisconsin and other states. By overuse, we mean the use in contexts that are not permissible under the law in Wisconsin and many other states and, in some cases, contrary to federal law.
The Problem: Noncompete Agreements for Low-wage Workers
Traditionally, noncompete agreements are applied regularly to sales personnel and technical experts to protect their employers from the misappropriation of customer goodwill and trade secrets should employees leave to join a competitor.
Recently, however, we’ve seen numerous instances in which low-skilled, low-wage workers – those with no access to customer lists or trade secrets – are employed conditioned on signing noncompete agreements. These agreements limit their mobility and thereby restrict workers’ ability to obtain the full value of their labor in a competitive market. Recent examples of noncompete agreements include those imposed on minimum-wage workers at Jimmy Johns,1 janitors,2 and manual laborers.3
These examples and others are described in an issue brief published by the American Constitution Society last month, which observes, “Taken in the aggregate, such widespread limitations on employee mobility have demonstrable, negative consequences for wages and innovation.”4
As a result of such abuses, the AFL-CIO and several other labor unions joined the Open Market Institute in petitioning the Federal Trade Commission to protect workers from noncompete agreements.5
Noncompete Agreements and Wisconsin Law
You might suppose noncompete agreements imposed on low wage, low skill workers must be lawful if they are so widespread. But in Wisconsin and many other states, they are not.
In Wisconsin, the law covering restrictive covenants is set forth by Wis. Stat. section 103.465:
A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint. 6
The law allows restrictive covenants only when “reasonably necessary” to protect the employer.7 In addition, covenants generally must be limited to a “specified” territory and duration.8 The law should be read to “encourage the mobility of workers.”9 Wisconsin courts view these covenants with “suspicion.”10
To be enforceable, restrictive covenants must:
be necessary for the protection of the employer; that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;
provide a reasonable time limit;
provide a reasonable territorial limit;
not be harsh or oppressive as to the employee; and
not be contrary to public policy. 11
The company has the burden to prove all five of these “prerequisites.”12
Under the first prerequisite, “[A]n employer’s protectable interest is limited to retaining top-level employees, employees who have special skills or special knowledge important to the employer's business, or employees who have skills that are difficult to replace.”13
Applying section 103.465, the court in Manitowoc Co., Inc. v. Lanning, concluded,
that the non-solicitation of employees provision is overbroad on its face. Without a specified territory or class of employees, the provision restricted [the defendant’s] conduct as to all employees of Manitowoc Company everywhere … each of the 13,000 Manitowoc Company employees regardless of the business unit in which they work or where in the world they are located.14
As Manitowoc points out, “section 103.465 is not limited to a covenant in which an employee agrees not to compete with a former employer.”15 Rather, it has also been applied to nondisclosure and nonsolicitation agreements which act as restraints of trade.
In Wisconsin, if part of a covenant is held invalid, the rest of the covenant is void.16 Most states allow the court to edit an illegal covenant into a legal one (commonly the “blue pencil” test), but Wisconsin follows the “red pencil” test that strikes the entire covenant if part of it is invalid.17
However, the existence of one invalid covenant does not void other separate covenants. For example, a court can void a nondisclosure agreement, but hold a noncompete as valid if it can separate the two, provided the latter covenant is reasonable and specific.18
This is not to say employers cannot ask employees to sign noncompete agreements – even ones which, in their factual context, may prove to be unreasonable and therefore unenforceable: “Neither the spirit nor the letter of Wis. Stat. section 103.465 establishes a well-defined public policy in Wisconsin against an employee's signing a covenant not to compete that he or she presumes to be unreasonable” 19
Rather, “the validity of a restrictive covenant is to be established by examination of the particular circumstances which surround it.”20
Thus, in Wisconsin, there is a very limited scope in which an employer can restrict an employee’s ability to gain alternative employment or compete after leaving its employ. Nonetheless, an employee may not be protected from termination if he or she refuses to sign an agreement that appears overly restrictive.
Noncompete Agreements and Federal Law
Federal law creates additional bases on which restrictive covenants can be challenged.
The National Labor Relations Act protects nonsupervisory employees right to organize and their right to bargain collectively. In Minteq International Inc.v. National Labor Relations Board (NLRB), the NLRB found that the employer’s unilateral imposition of noncompete agreements on employees covered by a collective bargaining agreement violated its duty to bargain with the union.21 As a result, the employer was ordered to rescind the noncompete agreements.
Additionally, the provision in the noncompete that prohibited interference with relationships with customers violated Section 8(a)1 of the Act, since it could be reasonably understood to prohibit employees from exercising their Section 7 rights to contact customers in support of a boycott in a labor dispute.22 Such provisions, or provisions that prohibit solicitation of employees to work for a competitor, may violate the Section 7 rights of unorganized employees who seek to solicit coworkers to join a union and work for a union competitor.23
The imposition of noncompetes and other restraints on employees’ mobility to obtain the best compensation and working conditions can also violate federal and state antitrust law. In 2015, a California federal judge approved a settlement of antitrust claims against Apple and Google for entering anti-poaching agreements in restraint of trade only after the amount of the settlement was increased to $415 million.24
A noncompete agreement in states where they are allowed can result in the same restraint of trade as an anti-poaching agreement. Indeed, the Wisconsin Supreme Court made precisely this point in Heyde Companies, Inc. v. Dove Healthcare, LLC when it noted that:
[t]he effect of the no-hire provision is to restrict the employment of ... employees; it is inconsequential whether the restriction is termed a “no-hire” provision between [employers] or a “covenant not to compete” between [an employer] and its employees.25
In 2016, the Illinois attorney general brought a complaint against Jimmy Johns, which it promptly settled by rescinding its noncompete and paying attorney fees. As Attorney General Lisa Madigan explained, “This settlement helps ensure Illinois’ workers have freedom to change jobs in order to seek better wages, further their careers and improve their lives,” and that “[w]orkers in Jimmy John’s sandwich shops should know they are not subject to these unfair and unenforceable agreements.”26
Conclusion: Noncompetes in Wisconsin are Limited
Wisconsin law is carefully tailored to allow only restrictive covenants specific in scope and limited to the employer’s protectable interest related to the high skilled talent. It does not allow such agreements to deprive the low-wage employees from their right to organize or to realize their full earning potential.
Class actions have the potential to reign in the abuse of overbroad noncompete agreements and other restraints of trade that violate Wisconsin and/or federal law, by providing a means of abolishing such restrictive covenants for an entire class, where often an individual employee cannot refuse such a covenant without risking termination.
This article was originally published on the State Bar of Wisconsin’s Labor & Employment Law Section Blog. Visit the State Bar sections or the Labor & Employment Law Section web pages to learn more about the benefits of section membership.
1 Samantha Monkamp, “Illinois AG sues Jimmy Johns over noncompetes pact; chain ‘disappointed’,” Chicago Tribune (June 9, 2016).
2 Sophie Quinton, “These Days, Even Janitors Are Being Required to Sign Non-Compete Clauses,” U.S.A. Today (May 27, 2017).
3 Conor Dougherty, “How Noncompete Clauses Keep Workers Locked In,” New York Times (May 13, 2017).
4 Flanagan, Jane, “No Exit: Understanding Recent Developments in Employee Non-Competes,” American Constitution Society (November 2019).
5 See “Petition for Rulemaking by Open Markets Inst., et al., for Rulemaking to Prohibit Worker Non-Compete Clauses,” Fed. Trade Comm’n (Mar. 20, 2019).
6 Wis. Stat. § 103.465.
9 Priority Intl. Animal Concepts, Inc. v. Bryk, 2012 WL 1995113, *5 (E.D. Wis. June 01, 2012), citing Gary VanZeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 214 (1978).
10 Id., citing Farm Credit Services of North Cent. Wisconsin, ACA v. Wysocki, 243 Wis. 2d 305 (2001).
11 Star Direct, Inc. v. Dal Pra, 2009 WI 76, ¶ 20.
12 Manitowoc Co., Inc. v. Lanning, 2018 WI 6, ¶ 40 (2018).
13 Id. at ¶ 49.
14 Id. at ¶ 59.
15 Id. at ¶ 5.
16 Priority Intl. Animal Concepts *4, citing Star Direct v. Dal Pra, 2009 WI 76, ¶ 78.
17 Schetter v. Newcomer Funeral Serv. Grp., Inc., 191 F. Supp. 3d 959, 962 (E.D. Wis. 2016).
18 Seesupra note 16.
19 Tatge v. Chambers & Owen, Inc., 219 Wis. 2d 99, 116 (1998) (majority op.), aff’g 210 Wis. 2d 51 (Ct. App. 1997) (no wrongful discharge when company fired at-will employee for refusing to sign nondisclosure and noncompetition covenants).
20 Id. at 116-117.
21 364 NLRB No. 63, 207 LRRM 1001 (2016) enforced, Minteq International v. NLRB, 855 F.3d 329 (D.C. Cir. 2017); rehearing en banc denied (2017).
22 Id. at *8.
23 Haynes Mechanical Systems advice memorandum 27-CA-171581, July 25, 2016.
24 “Tech workers will get average of $5,770 under final anti-poaching settlement,” Fortune.com, Sept. 3, 2015.
25 Heyde Companies, Inc. v. Dove Healthcare, LLC, 2002 WI 131, ¶ 14, 258 Wis. 2d 28, 36–37, 654 N.W.2d 830, 834.
26 “Attorney General’s Settlement Ensures Sandwich Shop Workers Will No Longer Be Subject to Restrictive Non-Compete Agreements,” Illinois Attorney General press release, Dec. 7, 2016.