While not at all unexpected, President Biden’s EO is catapulting the use of post-employment noncompetes to the forefront of conversations and business planning for US employers. So, what to do now?
- Employers should stay updated on noncompete laws in states where they have employees, given the continuing trend of states enacting or amending laws to further restrict noncompetes.
- Employers should expect action by the FTC in line with the EO–but should also keep an eye out for anticipated legal challenges to FTC action.
- Employers should inventory and review their noncompete agreements, ensure the agreements continue to comply with applicable law, and take any steps necessary to bring errant agreements back into compliance.
- Employers should consider the impact on any wide-spread rulemaking to how the organization manages employee-raiding/poaching, maintenance of trade secrets and confidential information and M&A.
- Finally, for employers with multi-national workforces, this may also signal a re-evaluation of the company’s use of noncompetes globally.
In more detail
The EO encourages the Chair of the Federal Trade Commission (FTC) to exercise the FTC’s statutory rulemaking authority to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” It is uncertain whether that rulemaking will entirely ban or just limit noncompete agreements; focus on restricting noncompetes for all workers or just those considered more vulnerable (such as low wage earners); restrict nonsolicit agreements along with noncompetes; or preempt state law.
The EO also encourages the Attorney General and the Chair of the FTC to consider revising the October 2016 Antitrust Guidance for Human Resource Professionals “to better protect workers from wage collusion” by (as the Fact Sheet explains) strengthening antitrust guidance to prevent the suppression of wages or reduction of benefits through employer collaboration and sharing of wage and benefit information. As we explained in a recent client alert, a push to scrutinize competition issues in labor markets was already in play, tracing back to the 2016 Antitrust Guidance, in which the Department of Justice and FTC alerted companies that “naked” wage-fixing and no-poaching agreements could be prosecuted criminally, and that employers competing to hire or retain the same employees are “competitors” from an antitrust perspective.
It’s important to note, however, that the EO itself does not change current law. As such, employers do not need to take particular immediate action. Employers can anticipate rulemaking by the FTC, however, and may want to prepare by evaluating their noncompetes sooner rather than later-including whether they are necessary, especially for particular groups of employees FTC action under the EO is likely to protect (such as non-executive employees, manual laborers, or low-wage earners).
State trend to protect lower wage employees from noncompetes
What is the current landscape and what’s trending? Nine states have enacted legislation limiting the use of noncompete agreements for low-wage earners in recent years, including Illinois, Massachusetts, Washington, and Oregon. The trend followed the Obama White House’s 2016 State Call to Action on Non-Compete Agreements, calling on states to ban noncompete clauses for certain categories of workers (including workers under a certain wage threshold). Even before the focus on low-wage earners, there was a growing trend of states enacting and amending legislation to restrict the use of noncompetes against employees. For instance, similar to California (see chart, below), both North Dakota (HB 1351) and Oklahoma (Title 15 O.S. section 219A) prohibit employers from entering into noncompetes with employees, and only allow noncompetes between the seller and the buyer in the sale of business goodwill, or between partners in the dissolution of a partnership (and, in North Dakota, the disassociation of one partner from a continuing partnership).
Most recently, Washington, D.C. enacted the Ban on Non-compete Agreements Amendments Act of 2020, which has been described as the strictest ban on noncompetes in the US and which will (subject to extremely narrow exceptions) make noncompetes entered into after the law’s effective date void and unenforceable. The Illinois General Assembly also recently passed a bill–expected to be signed by Governor Pritzker by 28 August, 2021–amending the state’s noncompete statute that will, among other things, prohibit employers from entering into noncompetes with employees earning USD 75,000 a year or less (with a graduated salary threshold increase to USD 90,000 in 2037). Besides restrictions on noncompete agreements, the new Illinois law also prohibits employers from entering into nonsolicit agreements with employees earning USD 45,000 a year or less (with a graduated salary threshold increase to USD 52,500 in 2037). Further, while New York does not have a statute concerning trade secrets or noncompete agreements in employment generally (the only state without one), in February 2021, the Trade Secrets Committee of the New York City Bar published a report proposing that New York State enact a statute to regulate the use of noncompete agreements by creating a rebuttable presumptive prohibition on using noncompetes for lower-salary employees.
The chart below provides a quick comparison of current restrictions on noncompetes in several notable jurisdictions.
||Are “traditional noncompetes” (i.e., agreements restricting post-employment conduct) allowed?
|| Additional information
||Cal. Bus. & Prof. Code §§ 16600-16607
||No, with limited exceptions in connection with the sale of a business (including the sale of goodwill); dissolution of a partnership or disassociation of a partner from a partnership; and dissolution of or termination of an ownership interest in an LLC.
||Employers can use other means to protect trade secrets and other information (including confidentiality and non-disclosure agreements).
|District of Columbia
||Ban on Non-Compete Agreements Amendment Act of 2020 (D.C. Law 23-209) (not effective until funded-anticipated effective date Fall 2021)
No, subject to narrow profession-based exceptions (unpaid volunteers, law members elected or appointed to office within any religious organization, babysitters, and medical specialists (defined as licensed physicians who have completed residency with a total compensation of USD 250,000 per year)).
Note: Defines a “non-compete provision” as a provision of a written agreement between an employer and an employee that prohibits the employee from being employed, either during or after the employee’s employment, by another person or operating the employee’s own business.
Employers still may use confidentiality and non-solicitation agreements.
Does not apply to noncompete agreements before the Act’s effective date, but does apply retroactively to workplace policies (i.e., workplace policies that prohibit the employee from being employed, either during or after their employment, by another person or operating the employee’s own business, are invalidated).
Requires all employers to provide specific written notice (regardless of use of noncompetes) under the Act. Notice must be given (1) ninety calendar days after the Act becomes effective, (2) seven calendar days after an individual becomes an employee, and (3) fourteen calendar days after the employer receives a written request for notice from the employee.
Employers can face liability for using noncompete provisions, and the Act makes it unlawful for an employer to retaliate against an individual for refusing to agree to, or failing to comply with, a prohibited noncompete provision.
||SB 672 (expected to be signed into law on or before August 28, 2021; would be effective for any contract entered into after 1 January, 2022)
No, unless several requirements are met: (1) the employee receives adequate consideration; (2) the covenant is ancillary to a valid employment relationship; (3) the covenant is no greater than is required for the protection of a legitimate business interest of the employer; (4) the covenant does not impose undue hardship on the employee; (5) the covenant is not injurious to the public; and (6) employers have provided employees with at least fourteen calendar days to review noncompete (and nonsolicitation) agreements and to advise them, in writing, of their right to consult with an attorney prior to signing the agreement.
Bans noncompetes for (1) employees making USD 75,000 per year in earnings or less (the salary threshold would increase by USD 5,000 every five years until reaching USD 90,000 in 2037) and (2) employees who are separated due to COVID-19 or “circumstances that are similar to the COVID-19 pandemic unless enforcement of the covenant not to compete includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.”
The definition of “non-compete” excludes nonsolicitation agreements, confidentiality agreements, trade-secret and invention-assignment agreements, agreements entered into with the connection with the acquisition or disposition of an ownership interest in a business, “garden-leave clauses” and “no-reapplication clauses.” However, the bill bans customer and coworker nonsolicitation agreements for employees making USD 45,000 in earnings per year or less (the salary threshold would increase by USD 2,500 every five years until reaching USD 52,500 in 2037).
Defines “adequate consideration” as (a) two years of continuous employment after signing the agreement; or (b) alternative consideration, such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
Adopts a “totality of the circumstances” standard for determining an employer’s legitimate business interest.
||Massachusetts Noncompetition Agreement Act (MGL c. 149, § 24L)
No, unless several requirements are met: (1) the agreement must be in writing, signed by both the employer and employee, and state the employee has the right to consult counsel prior to signing; (2) the employer provides notice of the agreement to the employee (the form and timing of which depends on when the employee is asked to sign the agreement–whether at the beginning or during employment–but noncompetes entered into during employment must be supported by consideration additional to continued employment); (3) the time restriction is for one year or less post-employment (unless the employee breaches his or her fiduciary duty or steals the employer’s property, in which case the noncompete can last up to 2 years); (4) it is “reasonable in scope”; (5) the employer has a “legitimate business interest”; (6) the noncompete includes a “garden leave” clause or other mutually-agreed consideration.
However, Massachusetts bans noncompetes with employees who are classified as “non-exempt” under the FLSA, and prohibits noncompetes with employees who are terminated without cause or laid off.
The restriction does not apply to other kinds of restrictive covenants, including non-disclosure agreements, assignment of invention provisions, and non-solicitation restrictions.
“Reasonable in scope” means if it is (1) limited to the geographic areas in which the employee provided services or had a material presence or influence within the last 2 years of employment, and (2) limited to the specific types of services the employee provided during the last 2 years of employment.
The law recognizes three legitimate business interests: trade secrets, confidential information, and employer goodwill.
The “garden leave” clause requires the employer to pay the employee for the duration of the noncompete period at least 50 percent of the employee’s highest salary within the last 2 years of employment. The employer’s obligation to pay the garden leave is relieved only if the employee breaches the agreement.
||Nevada Unfair Trade Practice Act (NRS Chapter 598A)
No, unless several requirements are met: the noncompete (1) is supported by valuable consideration, (2) does not impose any restraint that is greater than required for the protection of the employer, (3) does not impose any undue hardship on the employee, and (4) imposes restrictions that are appropriate in relation to the valuable consideration supporting the non-competition covenant.
However, noncompetes cannot apply to employees who are paid solely on an hourly wage basis, exclusive of any tips or gratuities.
|Employers cannot restrict a former employee from providing service to a former customer / client if the employee did not solicit the customer / client, or if the customer / client voluntarily chose to seek services from the former employee, and if the former employee is otherwise complying with the limitations of the noncompete. In addition, employers may not bring an action to enforce such restriction.
||New York is currently the only state without a statute concerning trade secrets or noncompete agreements in employment generally. In February 2021, the Trade Secrets Committee of the New York City Bar published a report proposing that New York State enact a statute that would create a rebuttable presumptive prohibition on the use of noncompetes for lower-salary employees.
||New York courts will enforce noncompetes only if: (1) the restrictions are no greater than required to protect an employer’s “legitimate protectable interest,” (2) they do not impose undue hardship or cause injury to the public, and (3) they are reasonable in both duration and scope.
||Previously recognized protectable interests include an employer’s trade secret, an employer’s goodwill and an employer’s interest in preventing loss of an employee whose services are special, unique or extraordinary.
||SB 169 (amended ORS 653.295 to further restrict noncompetes) (applies to agreements entered into on or after 1 January, 2022)
No, unless several requirements are met:
(1) the noncompete does not exceed 12 months from the employee’s termination; (2) the employee meets the income threshold for noncompete agreements of USD 100,533 in 2021 dollars (adjusted annually for inflation); (3) the employee is the equivalent of an “exempt” employee under the FLSA; (4) the employee is informed that the noncompetition agreement is a condition of employment in a written employment offer received by the employee at least two weeks before the first day of employment (or the employer imposes the noncompete on a subsequent bona fide advancement of an employee); (5) within 30 days after the date of the termination of the employee’s employment, the employer provides a signed, written copy of the terms of the noncompetition agreement to the employee; and (6) the employer has a “protectable interest.”
Restrictions generally do not apply to covenants to solicit customers or employees of the prior employer.
“Protectable interest” means the employee must have access to trade secrets, competitively sensitive confidential business or professional information, or is employed as on-air talent by an employer in the broadcasting business.
Employers can enforce noncompetes up to 12 months against employees who are not the equivalent of “exempt” under the FLSA or who do not meet the income threshold if the employer agrees in writing to provide the employee the greater of: (a) compensation equal to at least 50 percent of the employee’s annual gross base salary and commissions at the time of the employee’s termination; or (b) 50% of USD 100,533 (adjusted annually for inflation) for the time the employee is restricted from working.
||Texas Business and Commerce Code §15.50(a)
No, unless several requirements are met:
(1) they are ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and (2) to the extent that the noncompete contains limitations as to time, geographical area and scope of activity to be restrained, it is reasonable and does not impose a greater restraint than is necessary to protect the employer’s goodwill or other business interest.
|An employer’s restrictive covenants should be tied to (1) a confidentiality covenant in which the employer promises to provide the employee with confidential information, and then actually does provide such information; or (2) in limited instances, stock options designed to encourage the employee to develop goodwill with the employer’s customers.
||Chapter 49.62 RCW
||No, unless (1) they are against employees who earn in excess of USD 100,000 per year (or independent contractors who earn in excess of USD 250,000 per year); (2) they do not exceed 18 months; (3) any employee terminated as the result of a layoff is compensated during the noncompetition period; (4) mandatory noncompetition covenants are provided to prospective employees no later than the time the candidate accepts the job offer, and (5) independent consideration is provided to existing employees entering into noncompetition covenants.
Agreements requiring the application of non-Washington law or adjudication outside of Washington are void.
Noncompetition covenants entered into before 2020 must comply with the new law (effective 1 January, 2020).
Employers face penalties for noncompetition covenants that do not comply with the new law.
For assistance with this and your other employment needs, contact your Baker McKenzie employment attorney.
Contributors: Bradford Newman and Jeffrey Martino.