There’s been a lot of talk and debate in the business community on what the future of non-compete agreements can and should be. In 2021, President Biden signed an executive order directing the Federal Trade Commission (“FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
This administration has claimed it is looking out for low and blue-collar workers so they aren’t limited regarding future job prospects. However, when you look at the changes of non-compete agreements (which are a creature of state law), most protections are already designed with low-wage and blue-collar workers in mind. For example, Maine has instituted a threshold income to use non-compete agreements. On the far end of the spectrum, California has restrictions on non-compete clauses broadly—any provision that restricts an employee’s ability to practice a trade is void.
In practice, an extreme example of this comes from a case involving Jimmy Johns, which barred low-level, low-wage employees from taking jobs at competitors for two years and within a two-mile radius. This is an example of a non-compete agreement that the court looks at unfavorably. The court will look to see if the employer has taken the point of non-competes out of their intended utility.
The President’s executive order doesn’t seem to go after all non-compete agreements, only those it deems unfair. The Federal Trade Commission Act allows the FTC to prohibit unfair limits on competition. The term “unfair” is purposeful. If you look at a non-compete, there are three provisions: geography, length of time, and scope. Agreements are seen as unfair when they impose an unduly broad scope and are not narrowly tailored to protect business interests. Going back to the Jimmy Johns example: forcing that worker to go outside the geographical limit/imposing a time restriction is an unfair imposition on their job prospects.
Is there a clear category of what’s fair?
There could be. What’s fair or unfair right now is a sliding scale depending on where your jurisdiction is. As stated above, in California, non-competes are practically outlawed. However, in other states, there are presumptively unfair terms. For example, most states that place a limit on non-compete agreements limit the earning threshold or length of time the agreement is to be in effect. The FTC can use the same basic measures to determine what fairness is.
For now, the most important factor in determining whether a non-compete will be enforceable in your state depends on whether you’re in a “blue pencil” state. In such states, if the court finds that a clause is unenforceable or unconscionable, they will rewrite it or strike the clause. Again, the goal is to get to where the court deems the agreement fair.
What happens to remote workers?
The pandemic has accelerated the move to remote work for many employers across the country, and employers would be wise to revisit their non-compete agreements and address the changes as soon as possible. States vary on this issue as well. Take another example from California to demonstrate the restrictive end of the spectrum. If you’re a California employer, but your employee works in another state, a California court can completely throw out your non-compete agreement as a matter of public policy. In other states, even if you’re remote, the court will look at your employment locus. It also depends on what jurisdiction will be handling the dispute.
What to watch out for:
Proposed rules by the FTC will be released, and the public will have a chance to comment. The FTC is not likely to ban non-compete agreements outright. However, the non-compete protections will probably apply to low-wage employees and may require advance notice of a non-compete agreement to potential employees.
From a process perspective, the FTC must put out proposed rules for comment and notice and what you’ll see is pushback from other players in the industry. Once proposed rules come out, business leaders will follow the rules and the pushback.
You may have heard about legislation in this arena. While legislation is possible, it has largely fallen by the wayside and may stay there for a while, given the gridlock we currently see in congress.
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.