Michigan law currently permits employers to restrict the movement of their employees to competing businesses through the use of non-compete agreements. A bill recently introduced in the Michigan House of Representatives, however, seeks to change that.
House Bill No. 4198, introduced by Rep. Peter Lucido would operate to ban the enforceability of non-compete agreements, except in connection with the sale of a business.
This is certainly not the first time that a radical change in Michigan law has been proposed on this issue. Prior to 1905, reasonable non-compete agreements were permitted pursuant to the common law “rule of reason.” In 1905, however, non-compete agreements were outlawed entirely because they were thought to be against public policy, illegal and void. The law changed back in 1985, and reasonable non-compete agreements were again permitted. The proposed legislation, if it passes, would mark yet another about face on this issue.
Outside of Michigan, few states have laws that ban or make non-compete agreements unenforceable. While most states, including Michigan, merely limit the enforceability of non-compete agreements, certain states (e.g. California) prohibit them altogether.
Generally speaking, non-compete agreements are favored by employers who want to retain talent, and disfavored by employees who want the freedom to choose their own career paths.
The cost/benefit analysis, however, does not end there. A recent study suggests the refusal to enforce non-compete agreements, in states like California, has created a talent vacuum, robbing other states of their top innovators. The study reasons that top talent is inclined to leave states like Michigan, where their career movements may be limited, and relocate to other states where they can advance their career without artificial limitation.
The enforceability of non-compete agreements is also a hotbed for litigation in those states that do enforce such agreements. Should Rep. Lucido’s proposed bill become law it would undoubtedly result in a significant decrease in employment disputes between recently separated employers and employees.
Rep. Lucido’s proposed amendments to MCL 445.774a, the current statute permitting the use of non-compete agreements, may be found here.
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