EMPLOYER ALERT:
- Employers relying on non-competition provisions to protect their business interests should pay close attention to rapidly evolving laws at the state and federal levels that could effectively eliminate most existing and future non-compete agreements.
- Until and unless a nationwide ban comes into effect, employers with remote workers and employees in multiple jurisdictions must understand the laws of the states in which those employees live to ensure their non-competes are compliant and enforceable under the increasing number of state-level laws banning or limiting the use of such agreements.
- Employers should work with experienced employment counsel to review or modify their current non-competition agreements, given how quickly the legal landscape is changing.
Efforts to ban or limit non-competition agreements and equivalent provisions in employment or severance agreements are not new. But what was once the province of judges making case-by-case decisions in litigation, has now become an assault on the viability of non-competes by some state legislatures and the federal government. The pace and intensity of these attacks have accelerated in recent months, with states passing new bans and federal agencies asserting that most non-competes violate the law and should be prohibited.
For decades, judges across the country have chipped away at non-competes, narrowing the scope of what is acceptable and enforceable within each state’s legal framework. Because of the individual nature of each state’s laws, however, these decisions have created uncertainty for employers and employees as to what, if anything, constitutes a valid and enforceable agreement in a particular state. The “one size fits all” model agreement is no longer viable.
States Take the Lead in Banning or Limiting Non-Competes
In recent years, a growing number of state legislatures have inserted themselves into the non-compete fray, attempting to clarify or codify the allowable parameters, if any, of such provisions. These efforts have taken different approaches, some resulting in bans on non-competes altogether, with others permitting non-competes unless they involve lower-wage workers.
To date, California, North Dakota, Oklahoma, Minnesota, and New York have effectively prohibited all non-competes, with narrow exceptions. Maryland, Virginia, and Washington, D.C., are among the many jurisdictions that now ban non-competes for employees earning less than a specified salary/wage threshold, with the threshold being different in every state. For example, Maryland law currently prohibits employers with 15 or more employees from requiring current or new employees to sign a non-compete agreement if they earn $19.88 or less per hour (or approximately $41,350 per year). On January 1, 2024, the threshold will go up to $22.50 per hour (approximately $46,800 annually). In Washington D.C., the low wage threshold is $150,000 per year ($250,000 for medical specialists). In Virginia, the low wage threshold is “the average weekly wage” for the state, which adjusts annually and is currently $1,290 per week.
Many of these statutes provide civil or criminal penalties for employers who require employees to sign a non-compete, or attempt to enforce, or threaten to enforce, a non-compete that is prohibited by these statutes.
Federal Efforts Could (Almost) Result in a Nationwide Non-Compete Ban
But the most sweeping, dramatic, and potentially impactful developments in this area are at the federal level, where two agencies with broad authority over labor and employment matters, the National Labor Relations Board (NLRB) and the Federal Trade Commission (FTC), have either proposed rules or announced positions that would render non-competes void and unenforceable throughout the country with respect to employees who are covered by the National Labor Relations Act or the Federal Trade Commission Act. Because these laws do not apply to all employees or all employers, however, the proposed restrictions do not relieve employers of compliance with state law.
The NLRB
On May 30, 2023, the NLRB's general counsel, Jennifer Abruzzo, released a memo announcing that "the proffer, maintenance, and enforcement of non-compete provisions in employment contracts and severance agreements violate the National Labor Relations Act (NLRA) except in limited circumstances." Those "limited circumstances," do not include the usual goals for non-competes of avoiding unfair competition, retaining employees, or protecting investments in training employees. Instead, Abruzzo wrote that non-competes "could be lawful if they clearly restrict only individuals' managerial or ownership interests in a competing business." The NLRA only applies to non-supervisory employees, therefore, the general counsel's position would not affect non-competes for supervisors and managers.
The memo explains that overbroad non-compete agreements are unlawful because they prevent employees from exercising their rights under Section 7 of the NLRA, which protects both unionized and non-unionized employees' rights to take collective action to improve their working conditions. Specifically, Abruzzo wrote that these agreements interfere with employees' ability to:
- Concertedly threaten to resign to secure better working conditions.
- Carry out concerted threats to resign or otherwise concertedly resign to secure improved working conditions.
- Concertedly seek or accept employment with a local competitor to obtain better working conditions.
- Solicit their co-workers to work for a local competitor as part of a broader course of protected concerted activity.
- Seek employment, at least in part, to specifically engage in protected activity, including union organizing, with other workers at an employer's workplace.
Abruzzo's memo does not constitute binding or precedential law. Instead, it directs NLRB regional directors to submit cases that involve potentially unlawful non-competes to the NLRB's Division of Advice, which will decide whether to bring cases against employers based on Abruzzo’s directive. Abruzzo's position is a strong signal that the Board will aggressively scrutinize non-competes, especially for lower-wage workers covered by the NLRA. So far, one case has already been ordered to hearing on these issues. (See, JUVLY Aesthetics, No. 09-CA-300239 (NLRB filed July 7, 2022)).
The FTC
In January 2023, the FTC published a proposed rule that would make virtually all existing and future non-competition agreements that limit post-employment activities unlawful, void, and unenforceable.
If this rule is enacted, it would supersede any inconsistent, less-restrictive state laws, deeming non-competition agreements an "unfair method of competition" and thus unlawful under the Federal Trade Commission Act (FTCA).
The proposed rule would apply to all “workers,” which is defined as any employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor. It would invalidate any contractual term between an employer and a worker that expressly or in practical effect prevents the worker from seeking or accepting employment, or operating their own business, after their work with the employer ends. Although on its face this rule does not apply to non-disclosure, non-solicitation, or other restrictive covenants, such covenants may also be invalid if they would prevent the person from subsequent work – for example, a non-disclosure provision that is so broad as to prevent someone from working in their field. The rule would require employers to rescind existing non-compete clauses within 180 days of the effective date of the law, and to notify both current and certain former workers of the rescission in writing.
One notable exception to the rule applies to non-competes executed as part of the purchase and sale of a business. Specifically, the rule would not prohibit:
a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person's ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity's operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.
Although the proposed rule suggests uniformity in this area of the law, the FTCA does not apply to all employers in the United States: Certain banks, savings and loans, federal credit unions, common carriers, air carriers, foreign air carriers, and entities who are subject to the Packers and Stockyards Act of 1921, as well as businesses "not organized to carry on business for their own profit or profit of their members," are excluded. Employers not subject to this law would be left navigating the state-by-state variations discussed above.
Also, this rule would not invalidate non-competition provisions that apply during the worker’s employment or engagement with the employer or state laws that are more protective of worker rights, which means that employers covered by this rule would still have to be mindful of the various restrictions in their states.
Finally, like many of the state laws, this rule would make unlawful employer attempts to exploit worker ignorance about the law (such as entering or attempting to enter into a prohibited post-employment non-compete clause, maintaining one after the recission deadline, or representing to a worker, without a good faith basis for belief, that the worker is subject to an enforceable non-compete), and would carry penalties for doing so.
This rule has not yet become law. After announcing the proposed rule, the FTC received almost 27,000 public comments, including vocal opposition from the business community and equally strong support among workers' rights advocates. Given the deluge and intensity of comments, the FTC recently announced that it expects to vote on finalizing the rule in April 2024, almost a year after originally intending to do so. If the commission does enact a ban, litigation challenging its validity will inevitably and quickly follow.
Although neither the NLRB memo nor the FTC's proposed rule currently has the force of law, the combined federal and state-level antipathy towards non-competes should lead employers to tread very carefully if they rely on such provisions to protect their business interests. This includes engaging experienced counsel to review non-competition language to ensure it is enforceable in all applicable jurisdictions and tailored as narrowly as possible.
If you have questions about these developments or would like assistance reviewing and modifying your company's non-competition agreements, please contact Melissa Jones at Tydings.
This information has been prepared by Tydings for informational purposes only and does not constitute legal advice.