Weighing the Value of Employment Contracts Amid the Great Resignation
Workspan Daily
May 03, 2022
Key Takeaways

  • Utilizing employment contracts. Under the right circumstances, employment agreements can contain provisions that both protect employers and increase the ability to attract and retain talent.
  • Considering the use of non-competes. Employment contracts containing some form of a non-compete could cause employers to lose out on talent during a time of mass employee movement. 
  • Legal landscape. Nearly a quarter of states in the U.S. have an enacted or amended legislation limiting or banning the use of restrictive covenants in employment contracts and the Biden administration issued a directive to the FTC to curtail the use of non-compete clauses or other clauses that may unfairly limit worker mobility. 

While many employers were well aware of the increase in employee movement in 2021, the U.S. Bureau of Labor Statistics supported what’s been coined as “The Great Resignation” with data that more than 47 million Americans voluntarily quit their jobs last year. 

More recently, the Labor Department reported on Tuesday the number of times workers quit their jobs rose to 4.5 million in March, which broke the previous record set in November of last year. It’s estimated that there were 11.2 million job openings in March

Employers have responded by increasing compensation and offering more flexible, remote working options to better support attraction and retention efforts. Therefore, it might seem counterintuitive for organizations to add another layer of complexity to those efforts with employment contracts, but it could prove beneficial to both parties, on balance, if deployed in an intelligent fashion. 

Brian Hartstein, partner and chair of the labor and employment practice in the Chicago office at Quarles & Brady, acknowledged that employment contracts might not make sense for some organizations, depending on size and industry. However, under the right circumstances, employment agreements can contain provisions that both protect employers and increase the ability to attract and retain talent. 

“Narrow restrictive covenants and protections for confidential information, paired with contractually guaranteed compensation packages or even, under the right circumstances, some protections modifying standard ‘at-will’ employment, can serve as a significant incentive for attracting employees while also benefitting employers,” Hartstein said. 

For employers that already utilize employment contracts, Hartstein noted they might need to take measures to ensure they are less restrictive in the eyes of the prospective employee. An employee in the tech industry choosing between an organization offering a 10% higher base salary, but with an employment contract that includes a non-compete provision, might gladly choose the competing organization’s job offer with lesser compensation and no non-compete provision. 

“Employers need to weigh their desire to hire any particular candidate or satisfy a short-term staffing need against the value of those provisions and the longer- and medium-term interests they protect,” Hartstein said. “Employer also need to consider how removing or altering those restrictions for new candidates could impact their ability to enforce those provisions against others.” 

Legal Landscape 

From a legal perspective, many employers have already been forced by state law to remove clauses in employment contracts that are too restrictive. Hartstein said at least a dozen states have imposed additional restrictions to what can be included in an employment contract in the past few years. 

“This includes everything from wage thresholds, to notice requirements, to limitations on duration and/or payments required during the restrictive period and even, in at least one case, criminal penalties for violations of employee rights,” he said. 

Oregon, Nevada, Illinois and the District of Columbia are four of the most recent states to enact or amend laws that would limit, if not prevent, businesses from using non-compete provisions to block low-wage workers from jumping to competitors. 

There is no federal law restricting the use of non-competes, but the Biden administration has signaled an interest in finding ways to limit the use of such restrictive covenants. In his July 9, 2021 executive order, President Biden directed the Federal Trade Commission (FTC) to exercise its authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” 

The FTC's strategic plan reflected efforts to study the impact that non-competition agreement and other contractual terms had on employees. Hartstein noted that most observers anticipate the FTC will attempt to issue regulations governing these issues at some point in the next year or two.

“Unlike many traditional issues governing the regulation of employer/employee relations there has been bipartisan support for limiting or restricting the use of restrictive covenants,” he said. “Employers should anticipate more states will impose restrictions in the coming years and expect to see significant federal action, either via rulemaking or legislation.” 

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