Episode 184: Non Compete Agreements for Nonprofit Professionals | Signs of Coming Issues
Today we discuss the issue of non-compete agreements in the nonprofit sector, their impact on employees. What is behind the rise in non-compete agreements? What are the positives and negatives of non-competes and why is important to understand the implications of non-competes and making informed decisions to safeguard your career.
Welcome to another edition of Around with Randall, your weekly podcast for making your nonprofit more effective for your community.
And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett.
Thank you so much for joining me, Randall, on this edition of Around with Randall. A new subject maybe for many of us in the nonprofit world and if you're a consultant, maybe it's a little more viable in terms of conversations that you've had or have to something you have to deal with. But I was fascinated that it ran into this and then made a couple of phone calls and found a couple of other examples.
And the issue is non-competes. And while I think non-competes have surrounded and certainly are being discussed nationally, which we'll get to in a moment. I never thought about them, particularly when it came to nonprofits. In particular with gift officers and what I have discovered is there's a couple of examples where this actually popped up. And so I thought I would try to address it and I find it an interesting nexus for me because of my legal background and having been how to apply it to the work I do, particularly in consulting, and then also a little bit when I was in the executive at the Medical Center.
So let's start from the very beginning. Non-competes are used as probably most of you know to restrict access post-employment normally regarding someone who is a has a talent set that people are fearful could be used in a negative way against them as an individual or more importantly about the organization. So leaving one to go to another. They've been in existence forever. There are some basic reasons why this is occurring.
I think that number one there is a further realization particularly with gift officers and executives in nonprofits that they are very valuable and the relationships that they have have value. In particular if they are connected and or associated with larger funders and basically being stolen for access to certain people in the community that can make philanthropic gifts. This is further a problem challenge because our turnover rate for gift officers is anywhere between 18 and 19 months. For many of those who are turning over quite a bit it's because they don't produce. But we know that gift officers will leave and this comes back to the study that how it philanthropy did that I did two years ago when we were seeing the first moments of inflation that all of a sudden there was realization I'm not getting paid what I am worth and I'm expecting and demanding more resources salary because I'm an incredible ROI return on investment as a gift officer. I'm being paid X but I'm delivering 678 X times as much. I'd like a little bit more money.
The other situation that has occurred that I think plays a part is interest rates and you might say what wait what the mobility of people to change jobs and also while needing to change cities has become a little more complicated. We have gotten used to which is incredibly odd to 2% 3% interest rate so you're locked into a house that you can't move. By the way juxtapose that my parents bought their first house at 13.5% interest. So 6 and 7 is not the end of the world certainly not as good as 2 or 3 but context is important.
But the decision of wanting to move let's say take a job in another community and it's a great opportunity is being hindered or held back not just in the nonprofit world but all over the place. But the fact they've got a 2.38% interest rate on a 15 year fixed mortgage like well I can't give that up and move to another city where it may or may not be more expensive and take out an interest rate of 6.5 to 7.8% depending on the moment. So all of these things are meaning there's more pressure to find staffing in the same community. And when you put that pressure nonprofits I'm beginning to feel and it's at the higher ends healthcare higher ed probably some conversations around interest in larger nonprofits United Way so service bigger places there actually can contemplating this and in a couple of examples I had gift officers who came to me and said I need some advice for the first time I'm being asked to sign a non compete in this new job or I'm being asked to sign a non compete I've been here for 5 years I'm not sure what just happened and what this is done is caused a real problem for the individual the gift officer to say I'm uncomfortable with this first time they've done with it deal dealt with it.
It's also important to realize that there's movement on this entire issue so you may or may not have heard but the FTC the Federal Trade Commission issued an opinion in the last month that said we believe nonprofits or excuse me non compete are illegal they aren't allowed at all and they use their bureaucratic power to issue a ruling. Now those of us who maybe have studied the law are already seeing this going all the way to the Supreme Court most likely the question becomes not whether or not non compete or legal or illegal but does the Federal Trade Commission have the ability to make that kind of decision that is so widespread so impactful across the United States they I'm going to guess don't have that power it's the same time we're seeing some of the states get involved with this so there are four states and one's actually not state that have said in many cases for years that non compete are not legal in their state California North Dakota Oklahoma and Washington DC is the is the pseudo state that they're not even allowed the it's illegal so if you live in these states it doesn't make any difference what your employer wants to it's doesn't mean anything there are also states like Colorado Illinois main Maryland New Hampshire Oregon and Rhode Island plus Virginia in Washington state that prohibit non compete in a lot of different ways you have to be making so much money or you would have had to sell a business or something of that nature so there's this motion movement to say hey this is not good all of this comes around the issue of there being a lot of job openings and so when you put all of this together usually in larger cities and probably more sophisticated organizations being Los Angeles Chicago New York Miami Dallas Houston and you can name the bigger ones there's a fear of our best people our best gift officers going to another nonprofit and taking the relationships with them all of this brings us to what is all of this mean
So let's start generically with the positives and negatives of a non compete and you may come at this as a individual going non compete are totally unfair you may come at this as a consultant who owns a consulting company it sounds like me and you look at it and say well no no these there's positives of this I just want you to see both sides of the argument and then we'll get into the tactical about what you really should be thinking about if this happens to come to you or as the issue continues to grow so we'll concentrate by the way mostly on nonprofits I'll throw in some consulting examples say no I have some consultants that listen a little bit different perspective there similar but a little different variance so the first thing is what are the positives done compete.
So the first thing is is that it protects business what they call trade secrets and confidential information when you are a business owner and you set up your processes to do your job and I'll use me as an example how I do grateful patient work how I do campaign work how I do feasibility or counsel how I do coaching you want those things if you invest your time effort energy to remain yours confidential meaning you can use them if you believe they're any good and if they are good and you can attract clients with them you're like this works and I don't want others to be doing this if you have employees that can just take those things and leave and reapply them into their own not say new business then that becomes a really big issue because basically as my mom would say it's kind of stealing the other part is the relationships which actually applies into the gift officers is if you have and let's take a nonprofit and you have a really good gift officer that has great connections to huge philanthropists they can pick up the phone or text and there's immediate response you as an organization want to have invested in that person to develop those relationships talk about your mission and if someone else can come in and just take them and they can take those relationships that becomes a problem for that organization number two is is that non-compete in some ways unofficially force employers to invest in their employees because you don't want them to leave and so training I don't make them better education how can they grow even into things like up promotions a bonuses how do we reward the people that are delivering us the best because what we don't want is our best employees to fight a non-compete.
The last thing is is it prevents what maybe thought of unfair competition rating of information this was kind of alluded to in number one where you could have someone who goes in purposely and by the way in the for-profit world this is not uncommon but it's not unheard of where people go in try to get a bunch of information and then they use that information once they've learned it for a year or two to leverage a different opportunity it's unfair competition meaning trade triggered stealing we have a big issue and it's talked about from an international perspective with other countries stealing commercialized or industrialized secrets and taking them back to other countries and then replicating what we do here or pricking spying those are the big three that are positives there are also three that are negatives so when we think about non-compete the first thing is it restricts your employees or and employees mobility and career growth if all of a sudden you can't take a promotion because of a non-compete that's timey's growth number two is is that it reduces innovation and competition the innovation pieces could you take something you've learned someplace here leave and reintroduce it at a higher level because you see a different way of doing it the other thing is is competition so from a free enterprise perspective if you have multiple people competing for a particular job or you have multiple people competing for philanthropic relationships there's a value in that when we talk about supply and demand the more supply there is that means the price probably goes down because there's more options non-compete stymie that because innovation and competition meaning people going out and doing things on their own and creating a new way of doing it maybe doing it cheaper is hindered by a non-compete and the third is is that a non-compete especially when it's authoritative meaning you have to sign the sugar can't have a job we'll get to that in a moment creates immense legal and financial burdens on employee because if you've signed a non-compete in some way shape or form maybe haven't done the due diligence which is part of the job when you took it all of a sudden you're like as you're trying to go well how do I get out of this and now you're like don't you talk to a lawyer I gotta pay them I'm taking a chance if I leave somebody could sue me that's a financial burden there are positive and negatives to this but they're also alternatives and this is where we get into the combination of the tactical and thoughts to have when we talk about consultants this is where we get into a little bit wider perspective because consulting you may not move but you might have different areas geographically that you might serve so the first thing that's a possibility is limiting from a reasonableness perspective that's kind of the legal thought process how do I create something that's reasonable I want to protect what's mine but I'm not gonna I don't want to over restrict the employee or employees to be able to do what they need to do so how do you create that in terms of scope meaning you restrict it in terms of what it is they do and the Supreme Court's actually weighed in here.
I'll use a dental example because that was what the case was about where a dentist who was a day-to-day dentist signed or sold his company signed it on compete and then he wanted to be when he became an oral surgeon and the commentary from the people buying the company was or buying his practice that's we signed it on compete you can't do that and the Supreme Court said no that's not what you said you said he couldn't be a dentist he's not he's an oral surgeon and so scope matters meaning if you're a major gift officer but you're gonna go do annual giving work probably that's different the second is duration how long does somebody have to sit out if you have something or want somebody wants you to sign someone says you have to sit out of working in this field for three years I'm gonna tell you that the courts are gonna most likely and say that's not reasonable we'll get into a couple of issues just to keep in the back of your mind that might include that conversation or argument in a moment the third is by geographic area it's really hard to say well you can't go be a fundraiser anywhere in the country it's not reasonable in terms of geographic area could you say you can't be a fundraiser in Chicago that gets a little tougher because Chicago is a big area if you worked up let's say in Evanston but you moved down to Joliet to take a job that's those are really two different markets versus I think my Omaha much smaller much fewer people so part of this is to make sure that we're protecting the employees interest but not creating an undue burden or restriction so you can moderate number two is public policy there are certain areas where we say yeah we're not gonna apply confidential or a non-disclosure non-competition non-compete agreements so it's like firefighters and police officers those are public policy decisions that we need police officers so we're gonna do whatever we can to ensure that they have the flexibility to move where they need to move so just be aware that sometimes and this could apply to nonprofits depending on the type of nonprofit professional you are is what you're doing a public benefit meaning probably there should be a restriction on enforcing a non-compete the third is to ensure that there is immense clarity and disclosure as it comes to signing one unfortunately as and this is part of the statistical challenge the last number I saw is 11 to 12 percent of all employees in the United States are under a certain type of or a portion of a non-compete and in positions that don't need it if you are an unbelievably dedicated administrative assistant providing immense value to your organization it's really hard to argue that you shouldn't be able to go to another job and do the same thing we've got too many people under these agreements which is what the problem is and so part of this is making sure that it's not forced down employee's thoughts when they will every employee has to sign one in the organization not every employee should not every employee has the same value as it pertains to being able to take trade secrets or customers or confidential information. There are different levels of that kind of intrinsic value. It doesn't mean everybody doesn't have a role and everyone's not important, but not everybody is going to have the same access.
What we're seeing is more conversation around, "Hey, are the right people doing this?" and are you sitting down as an employer saying, "Let me explain to you what this does," and not just forcing people to sign it.
The last thing I want to talk about is what it is you should be aware of. The first thing, as we've mentioned a second ago, this is the tactical piece. Is there different roles? If the organization is forcing everybody to sign a non-compete, there's probably going to be a problem. But if you're an executive and you are at a nonprofit or any for-profit and you are the hub of the wheel things work through you, you know everything, it's possible the organization could try to restrict your ability to move.
Number two, are there unenforceable terms? And we talked about this a few minutes ago. Duration, you can't do anything for five years, or you can't do anything forever. I mean, that's just not reasonable. Or you can't do it anywhere in the country, or the activity. You can't do anything in philanthropy. There are lots of different roles in philanthropy. Those are not probably unenforceable. They're just not enforceable from a legal perspective.
Number three is, were you tricked or forced into signing? Number four, which I find interesting, which actually has happened. I have some personal experience where the employer says, "Make sure you get this signed," but the employee never signs it. They go into their work, and then all of a sudden, they leave, and they go, "Well, you signed a non-compete," and it turns out they never signed it. If you never signed it, it's unenforceable. I don't care what the company policy is.
The last thing I would say is, what did they offer you? And this is the follow-the-money conversation in two variations. If you signed a signing bonus, this is a contractual obligation. They gave you fifty thousand dollars, and if you stay three years, you don't have to pay it back. Plus, there's the non-compete. As soon as you get something that changes the equation when it comes to a non-compete, as well as in almost any contract, because you accepted something of value to give that up, they bought that. Now, if it's all kinds of other things that don't exist or it's too big or the unenforceable pieces of duration, geography, and activity, that's still going to be a part of the conversation.
But the way organizations are beginning to push into this is they're saying, "We gave you a signing bonus," and then we wiped it away after a couple of years. You're still on the hook. That's an issue. The second thing is, is the outcome. And I had a good friend that this is in banking who left one bank to go to another in the community and got sued, and the question became, well, did he take any of the customers to the telemiles leaving, try to steal them? No, he just left. Well, did the bank who he was at once lose any money from this? No. The money makes a difference. If you've given your rights away because you got something, or you're taking clients away, you're taking donors away, you're taking trade secrets away that makes someone else money or generates money and loses the organization you left money, that becomes an issue. That's a heavy burden for a court to figure out whether or not there is an executable agreement.
All of this is to say I think we're going to see more of this, particularly in large communities and the really valuable, really talented gift officers, money producers who organizations may start to say, "We got to lock you down." Here's my recommendation: make sure you're happy before you sign anything, make sure you're getting what you want before you sign anything, and if you don't want to do what they're asking, don't sign it. There may be a consequence for that, but the minute you sign, the onus becomes on you.
I would also argue the smaller the community, the geographic area that you have, the less likely they are to be enforceable. You can't restrict someone's ability to go make a living in totality. So, the bigger communities may have more flexibility with this. Smaller communities might not. And if you're a national nonprofit with employees all over the place, it's going to be harder to enforce a non-compete unless it's an incredibly high position, unless it's one that is CEO, CFO with immense knowledge and immense connections and they go to an organization almost the exact same. This is all about size and scope. I found it interesting that in literally under 45 days, I've had two or three conversations about this, which tells me there are more people thinking about it. We're going to have to think about it as well because if it moves the way I think it's going to, there'll be more people who are signing their rights away and then upset and angry when they can't move because they got a bad boss, they don't believe in the organization anymore, there are challenges, or heaven forbid, the great American dream, they get a better opportunity, and all of a sudden they don't feel like they can go.
Keep in mind all of these thoughts as you, as a valuable, important member of a nonprofit, look to your future. Think about them and know that what you're doing, what your decisions are today can affect you tomorrow. Don't forget, check out the blogs, two-week 90-second reads, interesting things that I see, feel, no, I think I know, at least on the website at halifelian3.com. You get an RSS feed right to you. And if you'd like to reach out to me, it's podcast@halifelian3.com. We are moving into the second half of 2024 here in a little bit. I think there's some interesting things that are going to come. We have an election of uncertainty. We've got a diminishment of donors that I think we're going to have the giving USA and giving collaborative come out and talk more about. I think we're going to have issues involving total dollars and we may see reduction in philanthropy as a whole. What you do is create the important relationships you build in the community, important the relationships you have internally are unbelievably important. Don't forget what I always say—some people make things happen, some people watch things happen, then there are those who wondered what happened. You're someone who's making something happen. You're finding other people who want to do the same, particularly if you're a board member or a fundraiser. You're finding those philanthropists who are trying to figure out how to make their community a better place. You represent a way that they can do that. You're people who are making things happen. That is incredibly worthwhile, and you're doing it for a population both of people and organizations who are wondering what happened. Or you go away to spend a professional career, realize the value that you bring every day. I'll look forward to seeing you next time right back here on the next edition of Around with Randall.