Non-Compete Agreements

Is a Federal Non-Compete Ban on the Horizon?

Advocates and lawmakers from both sides of the political aisle have long been pushing for federal reform of non-compete agreements – a restrictive covenant that can limit where employees are able to work after leaving a former employer. Now, many believe President Joe Biden is set to rally support for a federal law that largely eliminates non-compete agreements in all but the most limited circumstances.

The Plan to Eliminate Non-Compete Agreements

For decades, backers of federal non-compete regulation have argued that these agreements have become overly broad and excessively used, applied to all types of employment – from executives and professionals to service workers and student interns – and extended to every industry. One 2019 survey showed that somewhere between 28% and 47% of private-sector workers are bound by non-compete agreements.

The result, critics say, is that workers often find themselves unable to leverage their experience and skills to seek higher wages or a better opportunity with a competitor.

Considering these arguments, the Biden administration constructed a pro-worker platform that targets non-compete and no-poaching clauses in employment contracts. According to its Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, the administration will work to:

“Eliminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers. In the American economy, companies compete. Workers should be able to compete, too. But at some point in their careers, 40% of American workers have been subject to non-compete clauses. If workers had the freedom to move to another job, they could expect to earn 5% to 10% more – that’s an additional $2,000 to $4,000 for a worker earning $40,000 each year. These employer-driven barriers to competition are even imposed within the same company’s franchisee networks. For example, large franchisors like Jiffy Lube have no-poaching policies preventing any of their franchisees from hiring workers from another franchisee. As President, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.”

Narrowing the Non-Compete

The enforceability of non-competes and similar restrictive covenants has largely fallen under the domain of state common law and, increasingly, statutory law that varies by jurisdiction. Though it is unclear as to what a federal non-compete standard would look like, its intent would be to provide clarity amid the patchwork of state laws that can have very different views on the scope of an enforceable non-compete.

While most states recognize non-competes, several states – including California, North Dakota, Montana, and Oklahoma – outright ban or prohibit employee non-competes in all or nearly all situations. Washington, D.C. enacted its own ban on non-competes in January of this year. Other jurisdictions prohibit or limit enforcement for certain types of employees, such as low-wage workers (Maryland, Illinois), IT workers (Hawaii), and physicians (New Mexico, New Hampshire, and Texas). Texas, for example, allows for arguments against the enforceability of physician non-competes on various grounds, including public policy situations involving physicians in rural areas with limited access to care.

States also have differing laws regarding employer requirements necessary for enforcement. Some won’t enforce if workers are terminated without cause or don’t earn income that meets a monetary threshold. In Massachusetts, a recently enacted statute requires employers to provide workers with at least 50% of their salary during the term covered by the non-compete in order for the agreements to be enforceable. These discrepancies can make it difficult for employers to enforce non-competes across state lines.

Generally, most states will enforce non-competes that strike a balance between the interests of an employer and those of an employee. In Texas, non-competes must be:

  1. Reasonable in duration;
  2. Reasonable in geographic area; and
  3. Reasonable in the scope of restricted activities.

What is reasonable is highly dependent on the facts and circumstances of each agreement. Failure to meet these requirements can:

  • Render the non-compete unenforceable;
  • Subject the non-compete to modification; or
  • Prevent the party seeking the enforcement from receiving damages.

In Texas, for physician non-competes to be enforceable, they must also:

  • Allow access to patient medical records for up to one year following termination of the employment relationship;
  • Allow physicians to treat patients with acute illness as long as needed following termination of the employment relationship; and
  • Include a provision allowing for the buyout of the non-compete at a reasonable price or, upon mutual consent, for a price set by a neutral third party.

While there are differences in how states assess the reasonableness of non-competes, they generally recognize that such agreements are used to protect legitimate interests of the employer, such as the need to protect trade secrets and intellectual property that constitute a competitive edge.

It is here where a federal non-compete law would likely strive to create some uniformity. Under the Biden administration’s plan, non-competes would be eliminated in all but the very few limited situations where it is “absolutely necessary to protect a narrowly defined category of trade secrets.” What falls into this category, however, is still not yet clear.

Though the tides are turning toward federal regulation of non-competes, many questions remain. In addition to defining the limited situations that would allow employers to protect certain trade secrets using non-competes, the Biden administration will also have to clarify the scope of rulemaking power in this area held by the FTC or other regulatory agencies. Though many others say the FTC has the authority to regulate non-competes as unfair methods of competition, there remains no consensus within the agency.

How Can Employers (and Employees) Prepare?

A potential non-compete ban on the horizon should remind all employers that adequately protecting legitimate business interests, such as trade secrets and intellectual property, requires a comprehensive approach that aligns business goals with robust employment agreements or independent contractor agreements, IP protections, internal policies, as well as a plan of attack should infringement or misappropriation occur. Employers can also remain focused on creating non-competes that are reasonable in scope, duration, and geographic area to ensure they are enforceable should the time come to take them to court.

On the other side of the table, employees can still look to increase their bargaining power with respect to non-competes with attorneys who can help them review and negotiate employment contracts.

If you have questions about non-competes or protecting your business’ most valuable assets, Hendershot Cowart P.C. is available to help. Call or contact us online to speak with an attorney.

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