Non-Compete Agreements: Soon to Be a Thing of the Past?
August 13, 2023 by Morgan Buller
Non-compete agreements are a type of restrictive covenant between an employer and an employee designed to prohibit an employee from engaging in or accepting certain types of competitive employment or business opportunities. The enforceability of these agreements has been scrutinized heavily at both the state and federal level with many states implementing bans and key federal agencies proposing more widespread bans on non-competes.
State of the Law
State Level Bans
Since 2020, multiple states have implemented bans of varying degrees on non-compete agreements. California, North Dakota, Oklahoma and Washington D.C. have all banned non-competes with very narrow exceptions. Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington have each implemented a ban on non-compete agreements with employees earning below a certain salary threshold. Finally, the Hawaii Supreme Court held that non-compete agreements are unenforceable unless the non-compete serves a legitimate business purpose, including protecting trade secrets, confidential information, or special customer information. In contrast, Texas currently has well established authority governing and allowing the enforceability of properly drafted non-competes.
Federal Level Proposals
On January 5, 2023, the Federal Trade Commission (FTC) announced its proposal to ban employers from imposing non-compete agreements on their employees. If the FTC proposal becomes law, it would generally prohibit employers in the public sector that affect commerce and consumers from imposing non-compete agreements on employees, and would also require employers to rescind existing non-compete agreements and actively inform employees that their non-compete agreements are no longer in effect.
This proposal comes on the heels of the Biden Administration’s recent announcement regarding the focus on promoting competition and improving safeguards for employees. During the public comment period, the FTC received approximately 27,000 comments, which will be reviewed and used to consider changes to the proposed rule as currently drafted. The FTC is expected to vote on its proposal to ban non-competes in April 2024.
The National Labor Relations Board (NLRB) has become increasingly vocal when it comes to the enforceability of restrictive covenants, including restrictive covenants in severance agreements and now, most recently, non-competes. In May, NLRB General Counsel Jennifer A. Abruzzo issued a memorandum opining that non-competes, when overbroad or not narrowly drafted to only protect legitimate business interests, violate the Sections 7 and 8(a)(1) National Labor Relations Act (NLRA) and are unenforceable. Specifically, Abruzzo opined that “[n]on-compete provisions are overbroad . . . [and] tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” Abruzzo further stated that “the proffer, maintenance, and enforcement of a non-compete provision that reasonably tends to chill employees from engaging in Section 7 activity as described above violate Section 8(a)(1) unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights . . . and [an employer’s] desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.”
According to Abruzzo, not all non-competes, however, violate the NLRA. For example, in those instances where “employees could not reasonably construe the [non-compete] agreements to prohibit their acceptance of employment relationships subject to the Act’s protection” or in certain circumstances where a “narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances,” a non-compete agreement may not be in violation of the protections of the NLRA. It’s important to note that the NLRA does not apply to some classes of workers, including independent contractors, and in most instances, supervisors.
These federal propositions and recommendations are still in the preliminary stages and have not been formally adopted, but nevertheless could have a widespread impact on the future of non-competes, especially in the remaining states without bans.
Four Takeaways for Employers
- Audit non-compete agreements already in place for necessity, validity and enforceability. Audit your company’s non-competes and consider the following: (i) whether the terms of the non-compete are in compliance with the laws of the state of operation; (ii) whether the non-compete is narrowly drafted to protect a legitimate interest of the business, including protection of trade secrets, confidential information, or special customer information; (iii) whether the business interests can be protected through other agreements; (iv) specific levels of employee compensation; and (v) whether the non-compete with any particular employee is necessary to protect a legitimate business interest of the company.
- Know the law where your company operates. In Texas, for example, a non-compete agreement must be (i) accompanied by or part of an otherwise enforceable agreement; (ii) supported by valid consideration provided to the employee in exchange for signing; and (iii) reasonable in time, geographic scope and restrained activities. If any of these three requirements are not satisfied, the non-compete agreement is very likely unenforceable. Additionally, take steps and implement continual education opportunities to ensure that your Human Resources department or individuals responsible for drafting employment agreements, including non-competes, are up to date and knowledgeable about your state’s laws and any potential changes on the horizon.
- Understand the evolving nature of the enforceability of non-competes. The current environment related to non-competes and the necessity, validity, legality, and enforceability of non-competes is in a state of constant change. Staying current on the changes happening at the state and federal level, as well as the current state of the law in your state is helpful for both drafting non-competes for future employees and refining non-competes for current employees.
- In the event the NLRA or FTC proposals are implemented, ensure you understand whether these bans or limitations impact your employees subject to non-competes. The FTC protects competition and consumers through a variety of antitrust and consumer protection laws. Specifically, the FTC is tasked with investigating and preventing unfair competition, as well as unfair and/or deceptive acts or practices that affect commerce. If your business affects commerce and consumers, and your employees are considered workers in the private sector, the new FTC’s new proposal likely will affect you and your ability to enter into non-compete agreements with your employees. The NLRB governs most employees in the private sector, and does not include government employees, agricultural laborers, independent contractors, and most supervisors.
For now, Texas employers can continue to rely on narrowly tailored, well-drafted non-compete agreements that comport with Texas’s well-established parameters for such agreements. However, Texas employers should stay tuned to the FTC and NLRB’s evolving treatment of these restrictive covenants and seek the advice of trusted legal counsel when deciding whether to utilize and/or seek enforcement of non-compete agreements.