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Microsoft to Eliminate Noncompetes for Most Employees – A Harbinger of Things to Come?

Microsoft Corp. announced last week that it is immediately eliminating noncompetes for all employees below the partner and executive levels, including doing away with all existing noncompetes for covered employees. In a June 8, 2022 blog post, Microsoft’s Deputy General Counsel and Vice President of Human Resources said the following:

Empowering employee mobility: Microsoft believes that all employees should be empowered to work at a company they love and in a role where they thrive. We work hard to retain our world-class talent by making people the priority, and creating a culture that attracts and inspires world-class talent to unlock innovation aligned to our mission. While our existing employee agreements have noncompete obligations, we do not endorse the use of such provisions as a retention tool. We have heard concerns that the noncompetition clauses in some U.S. employee agreements, even when rarely and reasonably enforced, feel at odds with our talent principles. With these concerns in mind, we are announcing that we are removing noncompetition clauses from our U.S. employee agreements, and will not enforce existing noncompetition clauses in the U.S., with the exception of Microsoft’s most senior leadership (Partners and Executives), effective today. In practice, what this means is those U.S. employees will not be restricted by a noncompete clause in seeking employment with another company who may be considered a Microsoft competitor. All employees remain accountable to our standards of business conduct and other obligations to protect Microsoft’s confidential information. (Emphasis added).

This is certainly an interesting decision, and it raises the question of why now?

As readers of this blog will know, Washington State enacted a new noncompete law effective January 1, 2020, that, among other things, rendered unenforceable noncompetes signed by employees earning less than $100,000 and independent contractors earning less than $250,000 annually.  On January 1, 2022, those income floors were raised to $107,301.04 and $268,252.59, respectively. That said, according to internal Microsoft documents the average salary of a software engineer at Microsoft is around $185,000, with employees in the highest-earning band making as much as $500,000. Even entry level engineers at Microsoft earn around $132,000 according to the Microsoft documents. According to Glassdoor, the average salary for a software engineer at Microsoft is slightly lower, closer to $150,000, but that is still above the minimums set forth in the Washington law. As such, that law and its increasing income floors may have had an impact on Microsoft’s decision.

Another factor could be the so-called “Great Resignation” and the major competition for talent in the tech industry. Indeed, Microsoft no doubt competes for employees with companies based and/or with large workforces in California, which prohibits most noncompete agreements. And employees have far more bargaining power than in the past. So, eliminating noncompetes may very well be a recruitment tool. Though there is very little, if any, empirical evidence that the use of noncompetes makes it more difficult to hire employees in a competitive market, it is a common misconception and could make a difference on the margins.

Microsoft is certainly not alone in companies outside of California that have chosen, for reasons of company culture, not to utilize noncompetes. There has been a lot of negative media coverage surrounding noncompetes in the recent past – often unfairly focused on extreme cases of abuse – that could be leading companies of all sizes and in various industries to take a fresh look at their use and enforcement of noncompetes and balance the protections provided thereby with potentially negative press.

Somewhat relatedly, Microsoft also announced in the same blog post last week that it will be doing away with confidentiality provisions in its settlement and separation agreements as well:

Fostering a safe space for concerns: Microsoft’s policies and practices aim to reinforce that Microsoft is a safe space for employees to raise concerns. Our U.S. employee agreements specifically highlight employees’ rights to discuss or share terms and conditions of employment, or concerns of possible misconduct under Microsoft’s policy. Separate from employee agreements, there have been times when Microsoft resolved disputes with employees or provided separation benefits through agreements that had typically included confidentiality provisions. Microsoft has heard feedback that we can further strengthen our workplace culture and encourage employees to come forward with workplace concerns by addressing these nondisclosure clauses. To that end, Microsoft’s U.S. settlement and separation agreements no longer include confidentiality language that prohibits workers from disclosing alleged conduct that they perceive is illegal discrimination, harassment, retaliation, sexual assault, or a wage and hour violation occurring in the workplace. (Emphasis added).

This decision, although no doubt a genuine effort to foster a safe space for employee concerns, may be tied to another law recently enacted in Washington State, As we have previously reported, passed earlier this year, and effective as of June 9, 2022 (the day after Microsoft’s announcement), the “Silence No More Act” greatly restricts the scope of nondisclosure and non-disparagement provisions employers may enter into with employees who either work or reside in the State. More specifically, the Act prohibits employers from requiring or requesting that an employment agreement contain a provision “not to disclose or discuss conduct, or the existence of a settlement involving conduct, that the employee reasonably believed under Washington state, federal or common law to be illegal discrimination, illegal harassment, illegal retaliation, a wage and hour violation, or sexual assault, or that is recognized as against a clear mandate of public policy . . . .” This is almost verbatim the language Microsoft used in its announcement.

Only time will tell whether Microsoft’s decisions to eliminate noncompetes for most employees, and to remove nondisclosure provisions from separation and settlement agreements, will be aberrations or whether there is a trend afoot. Some states have imposed wage floors and other income restrictions on noncompetes over the past few years, meaning that companies necessarily will have to curtail their use of noncompetes for lower wage employees in those jurisdictions, and other states are likewise cracking down on requirements that employees agree to confidentiality as part of separation or settlement agreements. If these legislative trends continue, more companies may follow in Microsoft’s footsteps.

We will continue to monitor the situation and report back with any updates.