SALLY HERSHIPS, HOST:
You know when you start a job, you have to sign all this paperwork?
STACEY VANEK SMITH, HOST:
Yes.
HERSHIPS: So much paperwork. HR stuff, there's - I don't even - there's paperwork about paperwork.
SMITH: (Laughter).
HERSHIPS: Well, sometimes, hidden in that pile somewhere - probably wedged in a paperclip - is a contract. Sometimes, you read it. Sometimes, if you're me, you don't.
SMITH: (Laughter).
HERSHIPS: Well, unfortunately, wedged into that is something important. It's a part of the contract, and it is called the non-compete clause.
SMITH: Yes. So a non-compete clause is meant to do exactly what its name implies - to prevent employees from engaging in competitive behavior. So for instance, without a non-compete clause, the CEO of Coca-Cola could just quit his job, head over to Pepsi, say, Pepsi, I know all this stuff about Coke. You should hire me. And he could just give all of Coca-Cola's trade secrets to Pepsi at the drop of a hat.
HERSHIPS: Or Cardiff could head to the CBC, because he's supposedly on vacation right now.
SMITH: He's supposedly on vacation...
HERSHIPS: Is that true?
SMITH: ...But he was very excited about the Toronto Raptors in a way that made me question his patriotism.
HERSHIPS: Right? Well, this is why Cardiff probably had to sign a non-compete clause because non-compete clauses, they are kind of like corporate prenups. If a relationship ends, they are this legally binding agreement. It has to be adhered to, no matter how much you hate each other, or you could end up in court. Not only can non-compete clauses stop ex-employees for working for a competitor, they can also dictate the geography and the timing of these restrictions. Stacey, take the recent Michigan court case, Goldfish Swim School v. Aqua Tots.
SMITH: You have to tell me everything about Goldfish Swim School v. Aqua Tots.
HERSHIPS: (Laughter) There was a swimming teacher at the Goldfish School who signed a non-compete preventing him from working for a competitor within a 20-mile radius for one year after leaving his job.
SMITH: It's, like, teaching little kids to swim.
HERSHIPS: Teaching little kids to swim.
SMITH: Like, water wings.
HERSHIPS: Exactly.
SMITH: OK, and blowing bubbles.
HERSHIPS: This is what we think. The...
SMITH: That is a lot of intellectual property.
HERSHIPS: So the two - the employer and the employee - they parted ways. The swim instructor, he takes a job with the big competitor, Aqua Tots, and he got sued.
SMITH: They sued him?
HERSHIPS: They sued him.
SMITH: The Goldfish School sued him?
HERSHIPS: They sued him.
SMITH: Oh, were a lot of people migrating over to Aqua Tots?
HERSHIPS: Maybe.
SMITH: This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.
HERSHIPS: And I'm Sally Herships. Today on the show, non-compete clauses. Traditionally, non-compete clauses, they were used for white-collar workers to protect intellectual property and trade secrets. But now these non-compete clauses and lawsuits trying to enforce them are on the rise among all kinds of workers. Why?
Is it worth it for a corporation to spend the money to take a swimming teacher to court? And what effect do all these non-compete clauses and these lawsuits have on the economy?
SMITH: Also, what happened to the guy who went over to Aqua Tots? What happened to the Aqua Tots?
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HERSHIPS: Sarah Hutchins is a lawyer in Charlotte. She handles business litigation with the firm Parker Poe, and she sees non-compete cases all the time. She represents clients on both sides, employers and employees. And she says, to see how this world of non-compete clauses is changing, all she has to do is look out the window of her office.
SARAH HUTCHINS: Well, in Charlotte, we're seeing just a ton of growth, so, I mean, the city skyline is sort of filled with cranes. And, in fact, our offices are moving next year, and so I can see even the crane for our new building.
SMITH: And that is why workers like crane operators, teachers and security guards are getting taken to court for violating non-competes. The labor market right now in the United States is tight. Unemployment is low, and that makes employees in certain industries really valuable. Over the last decade, the number of non-compete lawsuits has almost doubled.
Like in the case of a security guard in Florida - he was a single dad, and he got a new job. He'd been on the job for just a couple of weeks, and he couldn't get childcare during his shift, so he quit. And he got another job, also in security, and his original employer sued. He was fired from his new job because he had violated this non-compete clause.
HERSHIPS: But these cases, they are expensive. A company suing an employee - even a security guard who's working for a fairly low wage - that kind of case can easily rack up half a million dollars in legal fees.
SMITH: Lawyers, man.
SMITH AND HERSHIPS: Lawyers.
HERSHIPS: And when you think about the kind of company that can afford to spend so much money on lawyers, you might wonder, why don't they just hire someone else? Hire another swim instructor. Hire another security guard.
SMITH: Right. Or if the market is so tight, why don't you just offer a better deal? Sweeten the pot. Raise wages or benefits. And, Sally, you put this question to Sarah.
HERSHIPS: I can understand very - just at a very visceral level why it might make sense if you're the CEO of a company, trade secrets, industry secrets, you know - but what about with a crane operator or another kind of blue-collar worker? Why - does it make sense?
HUTCHINS: Well, if you're looking at the long game, it definitely can.
SMITH: And here is how it can. Taking an employee to court, it is not just about that one employee. It is sending a message. Hiring is expensive. You have to advertise. You go through a ton of resumes. You interview. You interview again. You check references.
And, you know, we haven't even gotten to all the scheduling and negotiation and meetings. And then there is the training. You sink a lot of resources into a person when you hire them. So when companies take a worker to court, they're often trying to set an example. It's like a head on a pike.
HUTCHINS: If you have a non-compete agreement with your employees, and it's known that you don't enforce it or enforce it with some sort of regularity, well, you're sending a message to your employees about how seriously you take that.
SMITH: Yeah, like, no one is going to leave the Goldfish tiny children swimming school ever again.
HERSHIPS: No, that is terrifying. It's like that head on the pike. It's like a head on a pike...
SMITH: Tower of London, old blood stuff, you know?
HERSHIPS: That's pretty clearly - do you see what happened to him? That is the guy who left to work for the competition.
SMITH: Yeah, this is what happens if you go to Aqua Tots.
HERSHIPS: Don't do it.
SMITH: (Laughter).
HERSHIPS: But at the same time, Sarah says it can be really difficult to know what happens with a lot of these cases. Because they're so expensive, a lot of them tend to settle before a judge or jury weighs in. And she says geography also plays a role. So there are some states, like California, where non-competes are rarely upheld, regardless of the type of worker. On the other side, there are states like Florida, which are a lot less empathetic to workers and more likely to side with the company. And most states, they kind of fall in the middle.
SMITH: So there is a risk for companies. I mean, heads on pikes don't come for free. If you take a worker to court, white-collar or blue-collar, your non-compete clause, it might not hold up.
HUTCHINS: It could be found unreasonable, and that doesn't just affect that employer's relationship with that employee. That could be cited by other employees when they try to leave - that the agreement that they were asked to sign was unreasonable.
SMITH: Some states have even started pushing back. Courts in New Hampshire, Maryland, Delaware and Rhode Island have been siding with workers and saying these non-competes the companies are having people sign, they are unreasonable.
HERSHIPS: And that is what happened with the case of the Goldfish Swim School v. Aqua Tots.
SMITH: Oh, really?
HERSHIPS: Yes.
SMITH: It was thrown out?
HERSHIPS: The teacher who was sued by his previous employer, he won the case.
SMITH: Really? He won?
HERSHIPS: He won.
SMITH: Golden water wings.
HERSHIPS: There is also the effect non-competes can have on the economy, and the federal government has weighed in here. In 2016, the Obama White House said non-compete agreements, they hurt workers, like in the Goldfish Swim School case, and ultimately, they stifle the economy.
SMITH: Right? You have all these tiny kids who can't swim. That helps no one.
HERSHIPS: So the White House, it put out a call to action to reduce the prevalence of non-competes, which has gotten me thinking, Stacey.
SMITH: Yes?
HERSHIPS: I am filling in while Cardiff is on vacation.
SMITH: That's true.
HERSHIPS: I don't think I've seen my contract yet.
SMITH: Really?
HERSHIPS: Really. And I would like to take a look...
SMITH: Back off, CBC. You don't want to go up there anyway. It's cold. They don't have a lot to recommend them except for, like, maple syrup and poutine, but you can get great fries here in New York.
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SMITH: This episode was produced by Darius Rafieyan, edited by Paddy Hirsch and fact-checked by Emily Lang. THE INDICATOR is a production of NPR.
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