Non-compete agreements in employment contracts are one of the most commonly utilized strategies for businesses to retain staff or at least restrict attrition. A non-compete agreement, in essence, forbids employees from competing with their employer once their employment has ended, generally within a specific time range, industry, and geographic region.
Employers frequently utilize such agreements to retain talent and minimize the impact of a departing employee on business operations. Non-compete agreements have typically been considered lawful in an employment situation when narrowly tailored to address an employer’s genuine business interests and is limited in geographic proximity. However, in recent years, numerous states have passed legislation restricting or outright prohibiting non-compete agreements.
This poses a challenge for employers, who face various hurdles in today’s labor market. Following the pandemic market fluctuations, the demand for talent, particularly experienced or highly skilled talent, vastly outnumbers the supply. Employers in all industries, from healthcare and the sciences to tech, manufacturing, and hospitality, face employee retention challenges. The lack of talent retention affects investments in training and professional development, as well as a company’s ability to keep sensitive and proprietary information, including trade secrets, secure.
The Changing Legal Landscape Around Non-Compete Agreements
In addition, the regulatory environment affecting companies’ ability to keep top talent has changed in recent years. As indicated above, non-compete agreements have become more difficult for employers to enforce in recent years. Additionally, an increasing number of states have outlawed or severely restricted the use of non-compete agreements, so companies should exercise caution when contracting in this manner to retain talent. Employers must be conscious of the problems that recent changes in the employment landscape provide in addition to the usual challenges to attracting and keeping talent.
An employer should consider the following while drafting an employment contract with an accompanying non-compete agreement:
- What are the narrow business interests that necessitate a non-compete agreement?
- Is the non-compete agreement’s term length and geographic scope limited?
- What training, exposure to patients, clients, or customers, as well as other business methods and approaches, did the employer give that would allow the employee to compete unfairly with the company?
- What is the impact of the non-compete agreement’s enforcement on competition? Does the employee possess specific talent that would not be reasonably accessible in the geographic region covered by the non-compete?
Historically, government oversight of employer-employee non-compete agreements has been a matter of state law. However, an Executive Order signed by President Biden in 2021, directs the Federal Trade Commission (FTC) to consider using its rulemaking authority to limit or prohibit non-compete agreements. The Executive Order has no immediate legal impact, but if the FTC follows suit, federal restrictions could be the most comprehensive we have seen.
The US Department of Justice also acted when it filed a “Statement of Interest” in an ongoing private case in Nevada state court seeking to invalidate non-compete terms in employment contracts of physicians.
In determining the legality of the non-compete agreements under Nevada law, the DOJ Statement of Interest invites the court to consider competitive considerations under federal antitrust statutes. The DOJ claims that the non-compete agreement between the company and its workers is illegal under antitrust statutes in and of itself. Alternatively, the DOJ contends that the non-compete agreements should be declared unconstitutional since they are not the least restrictive way of achieving any acceptable economic objectives for the post-employment limitations.
Employment Lawyers are Ready to Help
When it comes to non-compete agreements, the devil is in the details. It is especially important to have an experienced employment law attorney draft or regularly review existing agreements in today’s dynamic regulatory landscape to ensure enforceability and avoid common pitfalls. If you’re an employer looking to arm yourself against unfair competition and need an experienced employment law attorney in Memphis, TN; St. Louis, MO, or surrounding counties, contact The Crone Law Firm by filling out our client form or by calling (901) 737-7740.