Non-competition agreements (or non-competes) are used by many businesses to restrict former employees from working for a competitor for some period of time after leaving their job. While there are many legitimate business reasons for non-competes, labor and consumer groups have complained that employers use them too broadly to prevent employees from finding better jobs and higher wages, which in turn hurts competition in the marketplace. In response to some of these arguments, President Biden signed an Executive Order on Promoting Competition in the American Economy on July 9, 2021. How the Order may affect businesses remains to be seen.
The Executive Order encourages the Federal Trade Commission (FTC) to regulate “the unfair use” of non-compete provisions and “other clauses or agreements that may unfairly limit worker mobility.” As clear by the language, it does not ban non-competes. The Order also targets other types of restrictive covenants, such as non-solicitation agreements.
The Order also instructs several federal agencies to review policies that discourage competition as discussed further below.
Traditionally, states regulate non-competes and other restrictive covenants in employment. There is no federal non-competition law currently, and past efforts in Congress have failed. However, the FTC has the authority to enact rules regulating unfair methods of competition under the Federal Trade Commission Act. This power has not previously been applied to restrictive covenants. Further, no courts have found that a restrictive covenant violates the FTC Act. As a result, there is a legal question as to whether the agency has the right to regulate restrictive covenants and if so, to what extent.
A non-compete is a contract between an employer and employee wherein the employee agrees to not work for a competitor or start a competitive business for a certain period of time and within a certain geographic area during employment and after the employment period ceases. Typically, non-competes are used for high-level employees or those with access to confidential business information. However, some employers use them more broadly. President Biden’s statement about the Order noted that “one in five workers without a college degree is subject to non-compete agreements.”
According to a 2016 Treasury Department Report, non-competes make it harder for employees to switch jobs, which in turn can keep wages low by reducing an employee’s bargaining position. It can also lead to experienced workers leaving the industry. Non-competes may also make hiring more difficult for employers. Potential employees with a non-compete will not be able to join a new company and those without a non-compete may not want to accept an offer because they do not want to sign a non-compete and face future restrictions on their career moves.
However, non-competes also reduce job turnover, which may make employers more willing to invest in job training. Further, it helps protect employers from prior employees taking confidential information gained during employment to a competitor.
Many states limit or prohibit the use of non-competes as an unreasonable restraint of trade. For example, California, Oklahoma and North Dakota will not enforce a non-compete. New York will enforce one, provided it meets specific requirements. A non-compete in New York must be reasonable in duration, geography, and scope. It should be no greater than required to protect an employer’s legitimate protectable interests. Further, it cannot impose an undue hardship on the employee or be injurious to the public.
The Executive Order also directs various agencies to enact rules to encourage competition and provide additional worker and consumer protections. Generally, agencies are tasked with increasing their scrutiny of mergers and investigating specific unfair practices that may inhibit competition or adversely affect employees or consumers. Industries affected by the directive include agriculture, banking and finance, healthcare and insurance, internet and technology, national defense, and transportation.
It will take time for the FTC to promulgate rules and they are likely to be challenged in court. However, the Executive Order and rulemaking may spur more states to ban or limit the use of non-competes.
If you have signed a non-compete agreement and are concerned that your new position may violate the contract, speak to an employment attorney about your options. Alternatively, if you are an employer, consult experienced counsel about whether your non-compete provisions are enforceable.