Non-compete clauses in employment contracts have come under increased scrutiny in the last few years by both U.S. federal and state lawmakers. Research has shown that these non-competes have decreased employee wages and prevented them from taking higher paying jobs. The latest question on their use comes from President Joe Biden. In Executive Order (EO) 14036 issued on July 9, 2021, Biden encourages the Federal Trade Commission (FTC) to ban or limit non-competes between employers and employees.
The FTC regulates competition and, in January 2020, held a workshop to explore an FTC rule that would significantly limit or perhaps even eliminate the use of workplace non-compete clauses in employment agreements. On April 13, 2020, the Department of Justice’s Antitrust Division and the FTC’s Bureau of Competition released a joint statement saying they would be on the alert for collusion and other anti-competitive behavior in the labor markets.
Biden now asks the FTC to take another look at workplace non-competes. EO 14036 encourages the FTC:
“To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
The Federal Workforce Mobility Act of 2021 (WMA), now in Congress, would ban most workplace non-compete agreements. In addition, California, North Dakota, Montana and Oklahoma ban non-compete clauses in employment contracts and more states are following suit.
Workplace Non-Compete Clauses: Use and Misuse
Corporate consolidations across business sectors and non-compete clauses have decreased wages by as much as 17%, according to research cited in a White House fact sheet. Tens of millions of American workers are required to sign non-compete agreements when taking new jobs—preventing them from finding new, similar jobs that pay more money.
Non-compete clauses typically impose restrictions that prevent workers from accepting employment or performing services for competitors for:
- A specific period of time; and/or
- In a defined geographic region, for example, within 10 miles, within the state or within the country.
In the past, non-competes were used with employees that would have access to information that, if disclosed, could jeopardize a company’s business, such as trade secrets or proprietary business information. Now, companies use non-compete agreements with workers who are paid hourly doing manual labor or serving in retail positions such as security guards, cashiers, customer service workers and baristas. Last year, the FTC highlighted a survey that found almost 14% of workers who earn less than USD 40,000 a year are parties to non-compete agreements.
Biden’s White House points out that non-compete agreements make it harder for workers in low-wage jobs to switch to jobs from companies who offer higher wages. According to a White House Fact Sheet, “Roughly half of private-sector businesses require at least some employees to enter non-compete agreements, affecting some 36 to 60 million workers.”
Biden’s latest executive order says non-compete clauses stifle competition and seeks to open competition back up.
The Federal Workforce Mobility Act of 2021: Will Interest Renew?
EO 14036 directs the FTC to focus on non-compete agreements that curb worker mobility when crafting regulations restricting the use of non-compete clauses. A longstanding effort to ensure worker mobility is reflected in the federal bipartisan bill called Workforce Mobility Act of 2021 (WMA) introduced by Sen. Chris Murphy (D-CT) on Feb. 25, 2021. The bill would ban non-compete clauses in employment agreements, except in the cases of partnership dissolutions and sales of businesses. The WMA was first introduced in Congress in October 2019 by both Sen. Murphy and Sen. Todd Young (R-IN), who is a co-sponsor of the 2021 bill.
The WMA, now setting with the Committee on Health, Education, Labor, and Pensions, states “no person shall enter into, enforce, or threaten to enforce a noncompete agreement with any individual who performs work for the person and who in any workweek is engaged in commerce or in the production of goods for commerce.” Furthermore, such non-compete agreements will be unenforceable.
However, the WMA contains key exceptions to the ban on non-competes, emphasizing the legal importance of non-compete agreements that ensure the protection of:
- The goodwill of a business for a buyer of the business;
- The goodwill and business secrets of a business owned by a partnership when a partner leaves or the partnership is dissolved; and
- Trade secrets.
These exceptions align with Biden’s EO asking the FTC to focus on worker mobility non-competes.
Experts speculate that federal lawmakers will take sudden interest in the WMA in the wake of Biden’s executive order addressing business and labor competition—not only to have a hand in drafting the laws and regulations that govern the use of non-competes, but to create uniformity as state law has always governed non-compete agreements and states have been passing statues that ban non-competes based on their sets of rules and restrictions.
State Non-Compete Laws: Stricter and Stricter
Most states recognize and will enforce non-compete agreements whether they are made between employers and employees or business partners. Companies enforce non-compete agreements under state law which may be longstanding common law on non-competes or statutory law. Enforcement requirements differ as well. For example, in the case of an employee non-compete, a state may refuse to enforce the noncompete when the worker is terminated without cause or the worker’s income does not meet a certain threshold.
Recently, more states are leaving common law standards behind and passing statutes to cover non-compete agreements between employers and employees. Maryland and Illinois place restrictions on enforcing non-competes against certain employees, including low-wage workers. Hawaii restricts non-competes for workers in IT, and New Hampshire, New Mexico and Texas each limit the enforceability of non-competes for physicians.
In May 2021, a new Oregon law says an employee non-compete agreement is enforceable only if:
- It is for 12 months or less
- The employee’s income meets a minimum threshold, and
- The employer pays the employee for the non-compete after employment has ended.
Effective in May 2021, Nevada law bans non-competes for employees paid on an hourly basis. As of this writing, Illinois Governor J.B. Pritzker is expected to sign a non-compete bill that would, among other things, ban non-competes for employees earning less than USD 75,000 a year, with that threshold increasing by USD 5,000 every five years until 2037.
Laws that vary from state to state can make compliance challenging for companies with multijurisdictional operations. Also, enforcement may be especially difficult as the circumstances of COVID-19 have led to remote, cross-state employment. Large- and mid-size companies may find they favor a federal law and federal regulations that provide guidance on employee non-competes.
Employers in the Changing Non-Compete Landscape
EO 14036 does not provide any guidance on workplace non-competes but does give companies a heads up that strict federal rules for workplace non-competes may be on the horizon.
Companies have a legitimate interest in ensuring that workplace non-competes protect trade secrets, intellectual property and proprietary internal practices. They have a right to ensure remedies are available from misappropriation or infringement by former employees. However, it is clear that companies will need to find new ways to balance protecting company interests and the ability of employees to find other employment through the use of non-competes. If worker mobility is the goal for state and federal law, non-compete agreements should not reasonably prevent employees from finding other work near their home where they can use their experience, skills and expertise.
Given the changing non-compete climate, it is a good time for companies to:
- Evaluate existing workplace non-competes and their policies around them;
- Prepare strategies for potential, or likely, changes in non-compete law; and
- Even start using narrower, less restrictive non-competes.
The key is to craft non-competes that will be enforceable should the company need to take a former employee to court. Courts may be less likely to enforce broad workplace non-compete agreements companies have used in the last few years.
Companies and business advocacy groups likely will challenge an attempt to ban non-compete agreements through federal agency regulations in federal court. However, FTC rules are only one piece of the workplace non-compete puzzle. Between state laws and pending federal legislation, companies are better off reviewing their practices now than later.
Staying on top of ever-changing regulations can be exhausting and time-consuming. An Employer of Record (EOR), such as Elements Global Services, allows you to focus on your core business, while we handle the complex task of ensuring tax and legal compliance in the U.S. and over 135 countries. Plus, Elements’ specialized HR and payroll consulting can help you understand, navigate and implement successful human capital management strategies.
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