President Joe Biden recently signed an executive order calling for restrictions on businesses’ use of noncompete agreements.
Businesses sometimes use noncompetes to keep employees from accepting a job with a competing company for a certain amount of time after leaving their employment.
The new order doesn’t change the laws on noncompetes in and of itself. However, as part of the order, the president asks the Federal Trade Commission (FTC) to issue a rule to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”
According to the White House, the order “includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” Of those, one provision focuses specifically on noncompetes.
The Fact Sheet that accompanies the order includes stronger language than the order itself, encouraging the FTC to “ban or limit” noncompete agreements.
According to the White House, around half of private businesses require at least some employees to sign noncompete agreements after they begin their employment. That amounts to around 36 to 60 million workers.
What does it mean for companies?
For companies that require workers to sign noncompete agreements, it is unclear at this point whether the FTC will issue regulations in response to this order.
However, the executive order likely means that noncompete agreements and other similar provisions will be closely scrutinized by the Biden administration.
It’s possible that the FTC will issue new regulations restricting noncompetes. If so, it would likely take months or even years to issue and finalize a rule.
The FTC and Department of Justice could try to fight noncompete agreements more often and/or expand the definition of what is considered “anti-competitive” in these agreements.
The FTC and DOJ could also revise their Joint Antitrust Guidance for Human Resource Professionals to address noncompetes more specifically.
No matter what eventually happens, the order sends a signal to companies to review and reevaluate their use of noncompete and similar agreements.
Here are some factors to consider when evaluating your company’s noncompete agreements:
- Evaluate what business interest you are trying to protect and whether the agreement is narrowly written to specifically protect that interest only.
- Consider which employees will be required to sign a noncompete. That may depend on income, job level and other factors.
- Evaluate to what extent the noncompete is reasonably limited in geographic scope and duration, including whether it bans the worker from taking another job industry-wide. It’s important to consider whether the agreement would effectively prevent the employee from earning a living.
- Look at whether the noncompete stops an employee from doing business with clients or customers they knew before working at your company.
- Determine whether you could have less stringent provisions that would accomplish the same goal, such as a confidentiality, non-solicitation, or non-interference agreement.
- Decide whether existing statutes or common law offer the company enough protection to avoid the noncompete entirely.
While companies await any further action by the federal government, the current state rules around noncompetes vary significantly across the country.
California, North Dakota and the District of Columbia essentially prohibit them. Several New England states, including Maine, Massachusetts, New Hampshire and Rhode Island, as well as Illinois and Washington, ban noncompete agreements for low-wage workers. Several other states require that noncompetes and other restrictive covenants remain reasonably limited in scope and duration.