Noncompete agreements took another step toward extinction when the Federal Trade Commission proposed a rule on Jan. 5 to ban such pacts between employers and employees.
The newly proposed rule would prevent employers from subjecting their employees to noncompete agreements, which the FTC says are costing American workers almost $300 billion – with a B – annually.
Such agreements have long been a common feature of American employment relationships, but the agency is taking the position that they are an unfair method of competition in violation of federal law.
More specifically, the agency says these agreements hurt competition “by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.” They also hinder innovation, the FTC asserts.
In addition to banning new noncompete agreements, the rule seeks to force employers to rescind existing ones. Employers would also have an affirmative obligation to tell workers that previously existing noncompete agreements are no longer valid.
In addition, the rule would apply broadly to independent contractors as well as employees.
It would not bar other types of restrictions, such as nondisclosure agreements, unless such restrictions essentially acted as noncompete agreements.
The move comes just one day after the agency took legal action to stop three employers from enforcing existing noncompete agreements against thousands of employees.
Many court rulings have addressed a myriad of issues relating to the enforcement of noncompetition agreements.
For example, in Realogy Holdings Corp. v. Jongebloed, 957 F.3d 523 (5th Cir. 2020), a sales manager for a luxury real estate brokerage firm in Texas was allowed to participate in a company stock compensation program, but to do so she had to accept a noncompete agreement. The agreement barred the sales manager from working for a competitor within a 15-mile radius for a year after she left the company. It was presented electronically on a website relating to the stock program. In exchange for accepting the agreement, the sales manager was also provided access to confidential company information. The sales manager left the company and accepted a job with a direct competitor. A federal appeals court upheld a lower court’s decision to issue a preliminary injunction that prevented the sales manager from working for the competitor. The sales manager said she did not remember clicking on the agreement and never assented to it, but the employer presented forensic evidence indicating she had done so. The appeals court also rejected the sales manager’s argument that she never received adequate consideration for entering into the agreement, noting her receipt of confidential information.
Following publication of the proposed rule in the Federal Register, the FTC will accept comments for 60 days before taking steps to finalize a new rule.
As we detailed in our earlier story below, the writing for this predicted move has been on the wall since the Biden administration entered the White House. In addition, as we have previously explained, many states and localities have already taken steps to ban or limit their use. Now, employers must be prepared for the strong likelihood that federal legislation may soon prevent them from subjecting employees to noncompetition agreements.
[THE FOLLOWING STORY WAS ORIGINALLY PUBLISHED ON AUGUST 18, 2022.]
Non-compete agreements: Another state just severely limited their use
Unless the tide turns, highly restrictive non-compete agreements are headed the way of the dinosaur.
More and more states and localities are taking action to curtail or bar their use. And even for employers whose states have not taken steps to limit or eliminate them, the writing on the wall indicates that federal regulation may be on the way soon.
Most recently, a Colorado law that took effect on Aug. 10 amended a previously existing state law addressing non-compete agreements in employment. The new Colorado law severely curtails the use of non-compete agreements in that state.
The amendment changed an existing Colorado statute addressing non-competes in several important ways.
One way to limit non-compete agreements without banning them altogether is to limit their applicability by income level. The Colorado amendment does just that, as it says employers can enter into such agreements only with “highly compensated” employees.
That definition is set by the state’s labor department and will adjust to reflect inflation rates. At present, no employee making less than $101,250 can be made to sign a non-compete agreement. This is a big change: Before, the statute limited applicability essentially by certain job titles, without regard to compensation level.
Non-compete agreements must be limited
In addition, the new law says non-compete agreements will be enforceable only if the restriction is no broader than needed to protect trade secrets such as client lists and pricing information.
And employers must tell applicants before they are hired that they will be subjected to such an agreement. The notice can’t just be part of an employment handbook; it has to be provided separately.
Employers that violate any of the statute’s requirements can get hit with a civil penalty of $5,000 per worker/applicant. Perhaps more strikingly, they can be charged with a misdemeanor criminal offense if they use intimidation tactics in connection with an unenforceable agreement.
Some covenants remain permissible, including reasonable confidentiality provisions.
In Colorado, then, non-compete agreements aren’t quite dead yet – but they certainly don’t have the teeth many employers would prefer.
Not just Colorado
A growing number of states and local governmental units have already moved or are moving toward bans or limitations on the use of non-compete agreements, to varying degrees.
In California, North Dakota, Oklahoma and the District of Columbia, for example, such agreements are either banned or severely curtailed because they are viewed to violate public policy.
Like Colorado, a number of other states have chosen to apply limitations that correspond to income level, including Maine, Maryland, New Hampshire, Rhode Island and Washington.
Oregon and Nevada also restrict the use of non-compete agreements. Many others also limit their use to varying degrees.
More local governmental units are also contributing to the trend. For example, Washington, D.C. Mayor Muriel Bowser signed legislation last year that includes one of the most expansive bans on such agreements of all legislation passed thus far, going so far as to say that employees cannot be barred from working for a competitor even during their current term of employment. The effective date for that law has been pushed back to October 2022.
Federal regulation looming?
Perhaps most notably for employers, there are signs of movement toward federal regulation in this area. At present, no federal statute explicitly addresses the use of non-compete agreements in employment. But President Biden is clearly not a fan of them. In fact, last year he signed an executive order that encouraged the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” A fact sheet accompanying the order says about half of private-sector employers require at least some of their employees to execute such agreements, affecting up to 60 million workers.
Until recently, it was a call to action that seemed largely symbolic. That changed in May of this year, when President Biden appointed a new Federal Trade Commission commissioner who gave Democrats a 3-2 majority.
Just a month later, the agency challenged a company’s acquisition of fuel outlets due to the presence of certain non-compete provisions in the asset purchase agreement. Although the move doesn’t relate specifically to employment law, it’s consistent with the executive order and could signal more federal regulatory activity that directly addresses the use of non-compete agreements in employment.
Bottom line: Know the law on non-competes in your state – and understand that in states where employers have relatively free rein to use them, those days may be numbered.