Every week, we provide at least two brief articles: typically, one concerns guidance on important labor and employment topics, and the other summarizes a recent or new labor and employment development (whether due to statutory change or case law). This article involves both – a new development as well as guidance regarding an area of law that has confounded employers for years due to the different limitations that exist on a state-to-state basis: the imposition of restrictive covenants on employees.
A restrictive covenant is something that limits an employee's business conduct, typically during and after their employment with the employer ends. Common forms of restrictive covenants involve limitations on sharing confidential information, recruiting or soliciting former co-workers to leave their place of employment, soliciting customers or vendors with whom the employee worked on behalf of a new employer or company, and working in a field or practice area that directly competes with the former employer. We have provided guidance on restrictive covenants on numerous occasions in the past (when state laws changed [here and here], with respect to best practices [here and here], etc.), but never have we written on an effort by the federal government to control in this arena – whether by Congress or the administration. Yet that is exactly what we write about today.
This past Friday, July 9, 2021, President Biden issued his Executive Order on Promoting Competition in the American Economy. Among the more than 70 initiatives identified in the executive order is a direction to the Federal Trade Commission to review what may be done to limit the use of noncompete agreements and eliminate restrictive occupational licensing requirements. The president identifies both practices as making it more difficult for American workers to bargain for better wages and improved working conditions, and as unduly restricting workers of color. "For workers, a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage."
So, does the executive order foretell a death for noncompete agreements in America? Unlikely. First, there is significant question whether the FTC has the legal authority to actually restrict or eliminate noncompete agreements as to all private employers. Second, the FTC process is not a "quick" process by any means – the review and final imposition of any regulations that may flow from the FTC is likely to take months, if not a year or more. Third, as many states have recognized, noncompete agreements do serve legitimate business and worker interests. In fact, where a noncompete agreement is unduly restrictive, or not necessary to protect a legitimate business interest, it is generally unenforceable.
Is there something that businesses should be doing now, notwithstanding the likely long wait before anything comes of this executive order with respect to noncompetes? Absolutely.
First, employers are encouraged to evaluate the need for imposition of noncompete restrictions on their employees: the evaluation should be with respect to whois subject to restriction, and the scope of such restrictions. Identify the specific lifeblood of your business that such a restriction is aimed to protect; is it doing that, or is it doing more than that? Second, if overbroad, change now: this can be accomplished by amendment of already existing agreements, and implementation of a limitation at the onset of employment with respect to whom is asked to execute a noncompete. This approach can then be further leveraged as a benefit to attract talent in the ever-increasing fight to find and hire employees as America exits the pandemic. Third, ensure that your business incorporates the proper policies, training, and care to protect your trade secrets from unfair competition. A noncompete is not the only arrow in the quiver to accomplish this goal – elimination of reliance on this one approach, and enhancement of others, will leave you in a far superior position if the FTC, Congress or your specific state decides to take the more drastic step of making noncompetes unlawful.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
