Here we go again…is this really the death of non-competes?
This has been a head-turning few months for employers. So many changes…big ones.
We have already covered the National Labor Relations Board (NLRB) decision to eliminate non-disparagement and confidentiality provisions in settlement agreements. Today, we are diving into non-competes in the wake of the Federal Trade Commission’s (FTC) announcement that it was opening rulemaking on federally eliminating non-competes. The FTC has been deluged with comments...some 16,000 have already been filed, so it has extended the comment deadline to April 19th. Reading the tea leaves in Washington is always dicey, but I believe non-competes are heading for a mass extinction event.
The FTC’s proposed rule would ban non-compete clauses in employment contracts.
On January 5, 2023, the FTC proposed a new rule that would eliminate new non-competes and abolish pre-existing non-competes—an aggressive stance. The FTC is taking aim at non-competes because it believes their use limits job mobility and depresses wages. But whether you buy that argument or not, the FTC isn’t the only one on this track. Three states (California, North Dakota, Oklahoma), as well as Washington D.C. already outlawed them with a few minor allowances (like the sale of a business). Nine other states (Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington) forbid the use of non-compete agreements unless an employee's salary exceeds a particular threshold. Additionally, courts all over the country have invalidated non-competes and put serious restrictions on their use. This patchwork quilt approach is a real mess for employers who now have remote workers nationwide or who have operations in several states. Federal intervention at this point would at least produce some very much-needed certainty.
The FTC’s rule doesn’t apply to non-solicitation agreements, but there are problems there too.
While the FTC hasn’t come gunning for non-solicitation provisions just yet, they too are on the chopping block in some states. Non-solicits are often used to protect proprietary information or customers—but in Illinois, for instance, non-solicits aren’t allowed for employees who earn less than $45,000 per year.
If you are an employer, what should you do?
Over the last number of years, I have been counseling my clients to abandon non-competes for most staff (executives excluded, of course). Why? Courts don’t like them and aren’t willing to tie up an employee unnecessarily in a free market economy. Additionally, a non-compete “infects” other restrictive covenant provisions (i.e., non-solicit and confidentiality) and makes it less likely a court will enforce those too. Finally, if you have operations and employees all over, you will spend lots of money editing and re-editing these and be able to use them in fewer and fewer states as time moves on. It simply isn’t worth it for the nominal benefits you will likely get.
As for non-solicits and confidentiality restrictions, those are going to be trickier to draft. In Arizona, as long as these are reasonable in time, scope, and geography, they should be okay for now. If you are using these provisions in other states, however, be sure to have them reviewed.