SALT LAKE CITY — A bill proposed in the Utah Legislature is drawing sharp criticism from a group of prominent local business leaders who claim that it could have a dramatic impact on economic growth in the state and negatively impact the state’s burgeoning business sector.
At issue is the use of non-compete language in employment contracts.
Critics worry that House Bill 251 Post-Employment Restrictions Amendments would stifle expansion in several of the state’s fastest growing industries, including technology, biotech, healthcare, transportation and media, among others. Additionally, they question whether the bill has received sufficient vetting within the legislative process by members of the business community that would be most impacted.
“We all need to understand the problem were trying to solve first,” said Dan Thomson, senior vice president and general counsel for Salt Lake City-based CHG Healthcare, urging a go-it-slow process. “Then we can work together to get a solution that is good for the people of Utah, for the companies in Utah, for our future growth and job development.”
Spencer Eccles, managing director of the Cynosure Group and formerly the executive director of the Governor’s Office of Economic Development, also took issue with the bill coming forward toward the end of the session, calling it “the most concerning thing that I’ve ever seen come out of (the Legislature.)”
Supporters contend that the measure attempts to carry out a “free market approach” that would allow individuals to have greater control of their own employment destinies.
“Try to put the words non-compete and free market in the same sentence,” said the bill’s author, said Rep. Mike Schultz, R-Hooper. He said that such agreements put employees at a competitive disadvantage when it comes to finding work in the industry they would be most qualified to work in.
“(The individual) can no longer compete in the same field where he was trained and may have had prior work experience,” Schultz said. “Now, he has a hard time providing for his family.”
Bill opponents said non-compete agreements do no such thing. They protect both a company and its employees from those who would leave to a direct competitor, taking their contacts, training and insight into the culture of the company with them. And such agreements are for a limited amount of time and do not prevent workers from continuing to work and advance in their field.
Non-compete contract clauses or "restrictive covenants" are those that under which one party — usually an employee — agrees not to enter into or start a similar profession or trade in competition against another party — usually the employer.
The premise behind such clauses is predicated on the possibility that upon their termination or resignation, an employee might start working for a direct competitor or startup their own enterprise, and gain a competitive advantage by exploiting confidential information.
Nationally, most states recognize and enforce various forms of non-compete agreements, with only a few states, like California, banning non-compete agreements except in limited circumstances.
For years, restrictive covenants have been popular among companies, particularly in companies involved in intellectual property development or technology innovation, and in broadcast media.
Schultz said that over the past two decades, the use of non-compete language in employment contracts has increased significantly. He said that the prevalence of restrictive covenant language has been harmful to the free market economic system.
“Start-up companies, as a percentage of our population, are at their lowest levels they have been in a generation,” he said. “You’re seeing big business come in and monopolize everything and it’s pushing out “the little guy.””
A number of local business leaders have united in an effort to fight the passage of the legislation, claiming that the bill would cause turmoil throughout numerous business and innovation industries.
“A non-compete is not there to prevent somebody from leaving, a non-compete is there to prevent somebody from taking your trade secrets or know-how and walking across the street,” said Eccles, whose company "sources, evaluates and manages direct private equity investments in profitable, small to mid-sized companies" according to its website.
He said that the bill does include language that would account for specific cases involving intellectual property as well as proprietary information or training, but the manner in which the measure is being moved through the legislative process has precluded interested parties from offering their input on how the bill should be crafted.
“Rushing this (bill) through without properly vetting it through committee and a public process (is wrong),” he said. “It’s discouraging to see this kind of process come forward in the last (days) of the session.” He noted that Utah's pro-business reputation could be impacted by the bill.
Business leaders have worked this week with members of the Legislature to find compromise language. Lane Beatie, president and CEO of the Salt lake Chamber of Commerce, issued an update to its membership Tuesday noting that business leaders had met with Schultz and Senate Majority Whip Stuart Adams, R-Layton.
"We are reserving judgment on the bill to confirm that our concerns have been addressed," Beatie wrote.
Adams, the bill's co-sponsor, said he is hopeful that a reasonable compromise can be met as stakeholders continue to meet and work on the language in the proposed measure. He confirmed meeting with those on each side of the issue on Tuesday and said discussions were ongoing.
“There are deep-seated feelings on both sides,” he said. “The idea is to try to get a policy that is best for the state.”
While the debate continues on Capitol Hill, a local legal scholar said the measure, if enacted, would allow free movement of labor permitting “the best employer” to retain their services.
“If you valued an employee, wouldn’t you want to develop a retention solution?” said Emily Rains, professor of business law at Westminster College.
“Non-competes aren’t intended to “chill” labor or employment, they are intended to prevent unfair competition.”
She said non-compete contracts impose unfair restrictions on individuals who would be precluded from seeking employment with companies that are within their industry of highest qualification.
“What the companies are saying is, “I don’t want to deal with competition,” she said. “But the marketplace flourishes when competition is healthy. It spurs innovation and development.”
Rains said that the proposed measure already included language that would prevent individuals from unlawfully taking and using trade secrets for another firm, which should adequately protect companies from being taken advantage of.
She disagreed with critics who believe the bill could have a significant negative impact on business economically, instead contending companies that learn to appreciate their employees would prosper as they figure out how to retain their most-valued workers.
“Having been a business owner, I would expect my labor to hold me to that standard,” Rains said.
But representatives of area businesses, including the trucking industry, the railroad, as well as technology and venture capital firms and broadcast media note the potential impact on companies that make a substantial investment in an employee through training, share strategies, build contracts by personal interactions, only to see that employee take those skills and relationships to immediately compete against the company.
For example, broadcast media companies typically use non-compete clauses for those broadcasters who are the public-facing arm of a company, such as news anchors and reporters.
Deseret Management Corp., which owns the Deseret News as well as KSL television and KSL radio, in some cases uses non-compete agreements in its broadcast properties.
House Bill 251 passed in the House and was introduced in the Senate on Tuesday. The measure now awaits a committee assignment for further legislative review.