Stronger Cover When On The Beach – Current Legislative Trends In Non-Compete Agreements

A pre-pandemic survey by the Economic Policy Institute in 2019 concluded that approximately one-half of all workplaces in the United States require at least some employees to enter into a non-compete agreement.[1] A lot has changed since, and a lot fewer people will be “on the beach” in times to come; and those who are, will have stronger cover.

This article provides an overview of trends concerning non-compete agreements, some of the recent important changes in the law (in states that may surprise you), where the law may be going in this dynamic field, and where businesses may choose to do business in the future.

“On the Beach” or “Gardening” – It’s No Vacation

As a preliminary matter, non-compete agreements generally seek to prohibit departing employees from working for, or starting a competing business in, a designated sphere of business or range of companies. Typically, non-compete agreements (and their related non-solicit requirements) are limited by a set time-frame, and often include geographic limitations as well. The idea is to ensure – or at least attempt to ensure – that the non-compete is limited in scope, reasonable and justified. Accordingly, narrowing characteristics are often advised to be included, such as specifying what is excluded from the non-compete range.

Businesses that require non-compete agreements cite the protection of trade secrets as justification, along with not wanting to invest in employee training only to see those employees take that training to a competitor or otherwise undermine the business of the employer.[2] Proponents would argue that having effective non-competes only benefit companies’ employees, by encouraging employers to share their valuable intellectual property and relationships with them – a win-win.

Retractors would argue that having long or otherwise restrictive non-competes unfairly and wrongfully benefit such companies, by interfering with a free market and pressuring employees to remain with companies when it would be to their benefit (and help the overall economy) to leave more freely.

The longer and more restrictive the non-compete being requested, the more justified and supported it is supposed to be. After all, having a non-compete agreement means the employee is restrained from a field of work – and possibly earning a living in their chosen field. An employee honoring the applicable non-compete agreement is commonly referred to as being on “garden leave” or “on the beach.”

Feel the Burn – Longer and Alone

Over the years in our firm’s law practice, we have seen non-competes creep from mere weeks to three, six, nine months, crossing the annual threshold to be as long as one year, 18 months, two years and more. These matters are now part of the regular diet of most company and executive employment lawyers.

Today, non-solicit agreements preventing former employees from soliciting their former colleagues have become standard in the financial services and tech industries, as well as other fields involving valuable personal/professional business relationships developed over time. In several cases, largely involving hedge funds and other financial services firms arguably employing proprietary techniques, certain non-compete agreements on their face can even be perpetual. Non-competes involving business relationships are also increasingly common but generally harder to justify, unless the agreement includes a specific list or clear description of competitors. Non-solicitation agreements involving business relationships, lasting one or even two years in duration, are increasingly the norm — and accordingly, are or should be expected by informed professionals.

For example, our firm was consulted concerning a non-compete agreement intended for a highly skilled but less experienced employee changing fields to work in the financial services industry. The position would expose the hire to unique substantive areas and new professional relationships. A non-compete section, which the company was initially considering stated, in material part (emphases added):

“During your employment with the Company and for two (2) years following termination of such employment for any or no reason (the “Restricted Period”), neither you, nor any person controlled by you, directly or indirectly, for your or the person’s own account, or as an employee, officer, director, consultant, stockholder, partner, member, manager, agent, independent contractor, associate, co-owner with anyone else, or otherwise on behalf of any other person, shall, without the express prior written consent of the President of the Company, either (i) organize, own, manage, operate, join, control, finance or participate in, or assist any other person to participate in the organization, ownership, management, operation, control or financing of, (ii) be connected as a principal, agent, representative, consultant, employee, investor, owner, stockholder, partner, member, manager, joint venture, or otherwise with, or (iii) permit your name to be used by or in connection with:

      any entity or enterprise engaged anywhere in the world in competition with the Company and/or its affiliates with respect to any business or activity that is substantially related to the current business of the Company (and/or any business of the Company or its affiliates with which you have been involved) (“Restricted Business”) … ”

Based on the current trending in the law discussed below, the aforementioned non-compete section would benefit from analysis and possible revision, and further limitation concerning:

• its application – is triggering the non-compete appropriate no matter the circumstances of the termination? How would this be justified in the event of a termination without cause by the company?;
• its duration – is two (2) years justifiable or too long? Would the duration in effect prevent the hire from working in the field?;
• its global reach – justifiable or too wide? Does the company do business globally, and where exactly?;
• its “person controlled” section – too broad in a variety of ways? If a close relative were to work for a competitor, would that person be covered?;
• its definition of “Restricted Business” – too vague (especially for a hire new to the industry)? Is the lack of definition of “business” or “activity” a problem?;
• its lack of consideration (payment or other material benefit) – would this pass muster if challenged? What would the bases be not to compensate the hire for stepping out of the field?

Lifeguards on the Way

Over the past several years – and especially the past two during the global pandemic – non-compete agreements have come under substantially increased scrutiny. Opponents see restrictive covenants as limiting earnings potential for employees and discouraging them from switching jobs or starting new businesses.[3] Basically, they are seen as anti-competitive. Critics observe that low-wage or lower-wage workers are regularly subjected to non-compete clauses, even though such employees are generally not in possession of significant proprietary information[4] that their employers would have a legitimate interest in protecting. On the other hand, particularly in the areas of finance, healthcare, and tech, proponents would argue the accessibility of such proprietary information is far easier and greater, and even more in need of protection. A non-compete agreement goes far to ward off wrongful takings, wrongful competition, and even theft.

In 2016, the Obama administration issued a nationwide call to action to “enact reforms to reduce the prevalence of non-compete agreements that are hurting workers and regional economies.”[5] Citing labor inequities and prioritizing economic growth over individual corporate interests in limiting competition, the President urged Congress to pass legislation that would prohibit such agreements for workers under a certain salary threshold. [6]

In response to such initiatives and concerns, a number of states enacted or amended laws in recent years to limit companies’ ability to subject their workers to non-compete agreements. These new laws range from near-total bans on enforcing such agreements, as in California and Oklahoma[7], to banning non-compete clauses for low-wage workers, as in Virginia, Maryland, Massachusetts, New Hampshire, Maine, Rhode Island and Washington state.[8] While each state’s definition of “low-wage worker” is different, a clear theme has emerged in the legislation that has been proposed and passed over the past two years; namely, an interest in protecting lower paid employees from the often strict limitations non-competes place on their future employment prospects. “Right to work” is coming back around to challenge non-compete advancements or excesses – depending on what side of the company wall you are on.

In 2021, the trend continued as Illinois, Oregon, and Nevada all amended their employment laws to limit the reach of non-compete agreements. Amendments to the Illinois Freedom to Work Act permit non-compete agreements only for employees with an annual salary of $75,000 or more (with salary threshold increases over time), and set forth regulations on non-competes for workers who are terminated, furloughed, or laid off due to COVID-19 or similar circumstances.[9] For example, as with some other federal and state statutes in the employment context involving waiting periods (e.g., during which the individual may consider the agreement before signing), the Illinois legislation requires a reasonable period of time for the employee to consider the non-compete request before it can be signed and valid, and the non-compete must be accompanied by sufficient consideration.[10]

Oregon law now restricts non-compete agreements to a period of twelve months post-termination and permits such agreements only for exempt employees (employees exempt from overtime) whose annual income exceeds $100,533 at the time of termination.[11]

But wait, there’s more.

The Nevada legislature recently passed Assembly Bill 47, which revised the state’s non-compete law to prohibit such agreements from applying to workers who are “paid solely on an hourly wage basis.”[12] Additionally, the District of Columbia has passed a law banning non-compete agreements for all employees working in the District, with an exception for some medical specialists, and would even prohibit businesses from limiting employees’ outside business activities, including those which may be competitive[13], making it one of the strongest non-compete laws in the United States. Though passed in early 2021, the D.C. ban is not in effect and enforceable until October 1, 2022, due to procedural aspects of D.C. legislation[14][15].

What’s on the horizon?

Closing the Beach? Just a Smaller One

In addition to setting salary level thresholds and time-based limits for non-compete agreements, state laws may also set forth what makes a non-compete valid in situations where they are permitted. These can include, for example, additional or greater advance notice and consideration periods for employees, revocation periods, and/or requirements to pay former employees during the non-compete period. Some state laws also codify common-law standards for non-competes, such as making such agreements only as broad as necessary to protect an employer’s legitimate business interests.[16]

The Illinois Freedom to Work Act is particularly instructive here. Section 15 of the Act provides, for example, that ”A covenant not to compete or a covenant not to solicit is illegal and void unless (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, and (5) the covenant is not injurious to the public.”[17] Taken together, these are high bars.

Federal Limits to the Beach?

While regulation of non-compete agreements remains up to the states, the federal government continues to take interest in the issue. In 2019, the bipartisan Workforce Mobility Act was introduced in the Senate,[18] then reintroduced in 2021.[19] If passed, the Act would prohibit non-compete agreements in almost all employment situations, while still permitting non-disclosure agreements to protect trade secrets.[20]

Also reintroduced in 2021 was the Freedom to Compete Act, which would have prohibited non-compete agreements for employees classified as non-exempt under the Fair Labor Standards Act – generally those employees earning under $50,000 annually.[21]

Furthermore, on July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy which, among many other things, encouraged the Federal Trade Commission (FTC) to consider taking action against the “unfair use” of non-compete clauses to enhance worker mobility[22] and stop the stifling of economic competition.[23]

Although these efforts have yet to result in any federal legislation on the matter of non-compete provisions, they demonstrate a growing opposition to such agreements as both unfair to employees and a deterrent to economic development.

Limit Risks of Burn

While employers in many states will now face increasing challenges in requiring and enforcing non-compete agreements, federal and state lawmakers alike recognize that businesses have a genuine need to protect their trade secrets, proprietary relationships, and other confidential information. As such, many non-compete laws in the U.S., however strict they may be otherwise, still do allow exceptions for the protection of proprietary information, such as non-disclosure agreements, which are increasingly common. Even in Washington, D.C.’s aggressive non-compete law makes clear that it does not apply to any “otherwise lawful provision that restricts the employee from disclosing the employer’s confidential, proprietary, or sensitive information, client list, customer list, or a trade secret, as that term is defined in section 2(4) of the Uniform Trade Secrets Act of 1988.”[24]

Non-compete laws are not intended to jeopardize employers’ intellectual property, but to give employees, especially lower-wage workers, a more fair chance at higher pay, career advancement and job mobility, without negative consequence. Non-compete agreements incentivize companies to open their know-how to their employees, and involve them more closely in the development and business process. If reasonable, non-compete laws, and non-compete agreements, can protect everyone’s interests.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Helen D. “Heidi” Reavis who counsels clients in areas of corporate operations and brand management, employment matters and dispute resolution, and media and intellectual property law.

 

 

 

[1] Alexander J.S. Colvin and Heidi Shierholz, “Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights.” Economic Policy Institute, December 10, 2019. Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights | Economic Policy Institute (epi.org)

[2] Ryan Nunn, “Non-compete contracts: Potential justifications and the relevant evidence.” Brookings, February 4, 2020. Non-compete contracts: Potential justifications and the relevant evidence (brookings.edu)

[3] Alexander J.S. Colvin and Heidi Shierholz, “Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights.” Economic Policy Institute, December 10, 2019. Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights | Economic Policy Institute (epi.org)

[4] Stephanie Ferguson, “6 Questions About the Impact of Non-compete Agreements on Businesses and Employees.” U.S. Chamber of Commerce, December 6, 2021. 6 Questions About the Impact of Non-compete Agreements on Businesses and Employees | U.S. Chamber of Commerce (uschamber.com)

[5] “Fact Sheet: The Obama Administration Announces New Steps to Spur Competition in the Labor Market and Accelerate Wage Growth.” The White House, October 25, 2016. FACT SHEET: The Obama Administration Announces New Steps to Spur Competition in the Labor Market and Accelerate Wage Growth | whitehouse.gov (archives.gov)

[6] Id.

[7] Chris Marr, “Employee Non-compete Clause Limits Adopted by Three More States.” Bloomberg Law, June 29, 2021. Employee Non-compete Clause Limits Adopted by Three More States (bloomberglaw.com)

[8] Chris Marr, “As States Limit Non-competes, D.C. on Verge of Outlawing Them.” Bloomberg Law, December 14, 2020. As States Limit Non-competes, D.C. on Verge of Outlawing Them (bloomberglaw.com)

[9] “Illinois Freedom to Work Act.” 820 ILCS 90/  Illinois Freedom to Work Act. (ilga.gov)

[10] Id.

[11] “Chapter 653 — Minimum Wages; Employment Conditions; Minors.” https://www.oregonlegislature.gov/bills_laws/ors/ors653.html

[12] “Assembly Bill No. 47 – Committee on Commerce and Labor.” AB47 Text (state.nv.us)

[13] “D.C. Law 23-209. Ban on Non-Compete Agreements Amendment Act of 2020.” D.C. Law 23-209. Ban on Non-Compete Agreements Amendment Act of 2020. | D.C. Law Library (dccouncil.us)

[14] Ian T. Clarke-Fisher and Leslie J. Levinson, “The Ever-Changing Landscape of Non-Compete Agreements – Recent Developments.” The National Law Review, September 28, 2021. Recent State Developments on Non-Compete Agreements (natlawreview.com)

[15] Washington, D.C. Council Bill 240683, https://legiscan.com/DC/votes/B24-0683/2021.

[16] “Illinois Freedom to Work Act.” 820 ILCS 90/  Illinois Freedom to Work Act. (ilga.gov)

[17] “Illinois Freedom to Work Act.” 820 ILCS 90/  Illinois Freedom to Work Act. (ilga.gov)

[18] Alexander J.S. Colvin and Heidi Shierholz, “Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights.” Economic Policy Institute, December 10, 2019. Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights | Economic Policy Institute (epi.org)

[19] Ian T. Clarke-Fisher and Leslie J. Levinson, “The Ever-Changing Landscape of Non-Compete Agreements – Recent Developments.” The National Law Review, September 28, 2021. Recent State Developments on Non-Compete Agreements (natlawreview.com)

[20]  Alexander J.S. Colvin and Heidi Shierholz, “Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights.” Economic Policy Institute, December 10, 2019. Non-compete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights | Economic Policy Institute (epi.org)

[21] Ian T. Clarke-Fisher and Leslie J. Levinson, “The Ever-Changing Landscape of Non-Compete Agreements – Recent Developments.” The National Law Review, September 28, 2021. Recent State Developments on Non-Compete Agreements (natlawreview.com)

[22] “Executive Order on Promoting Competition in the American Economy.” The White House, July 9, 2021. Executive Order on Promoting Competition in the American Economy | The White House

[23] “Fact Sheet: Executive Order on Promoting Competition in the American Economy.” The White House, July 9, 2021. FACT SHEET: Executive Order on Promoting Competition in the American Economy | The White House

[24] “D.C. Law 23-209. Ban on Non-Compete Agreements Amendment Act of 2020.” D.C. Law 23-209. Ban on Non-Compete Agreements Amendment Act of 2020. | D.C. Law Library (dccouncil.us)