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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 Texas non-compete agreement attorneys at Hendershot Cowart P.C. consider the implications of such a ban:

Biden's 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.”

Recent Developments on Non-Compete Agreements and the Federal Government:

In July 2021, President Biden issued an executive order encouraging the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” This executive order does not change the law in Texas or in other states; it merely encourages the FTC to act. In December 2021, the FTC initiated informal fact-gathering workshops and panels on competition in labor markets, and may be poised to move forward with formal proceedings in 2022.

Congress also is considering federal action on non-compete agreements in employment contracts: The Freedom To Compete Act, introduced in July 2021 by Senator Marco Rubio (R-Fla.) and Senator Maggie Hassan (D-NH), is a bi-partisan bill intended to protect entry-level, low-wage workers from non-compete agreements that "limit their employment opportunities and restrict their ability to negotiate higher wages and benefits." If passed, the Act would void all non-compete agreements and prohibit them going forward, except for certain exempt employees. For now, the Act remains pending in committee.

In the meantime, the enforceability of non-competes and similar restrictive covenants has largely fallen under the domain of state common law. 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.

Which States Prohibit Non-Compete Agreements?

Most states recognize non-competes, but laws are actively changing. There are several states – including California, Colorado, North Dakota, Montana, and Oklahoma – that 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 2021. Other jurisdictions prohibit or limit enforcement for certain types of employees, such as lower-wage workers (Maryland, Illinois, Oregon, and Washington), hourly workers (Nevada), IT workers (Hawaii), and physicians (New Mexico, New Hampshire, and Texas). Oregon also limits the time period for non-compete agreements to 12 months post-termination.

Several of these legislative changes happened recently – in the past six months – so employers should consult their attorney to ensure that employment agreements and non-compete agreements are enforceable and up-to-date.

States also have differing laws regarding employer requirements necessary for enforcement. 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. Some states won’t enforce non-compete agreements 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.

Are Non-Compete Agreements Still Enforceable in Texas?

Unless a federal law is passed, most states with laws similar to Texas will continue to uphold non-competes that strike a balance between the interests of an employer and those of an employee.

In Texas, to be enforceable, a non-compete agreement 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, there are additional requirements for physicians. For a physician non-compete agreement to be enforceable, it 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.

How Can Employers (and Employees) Prepare for a Federal Non-Compete Ban?

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.

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, independent contractor agreements, IP protections, internal policies, as well as a plan of attack should trade secret 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. An experienced Texas non-compete attorney can help you review and negotiate employment contracts to protect your future career options.

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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