Are the Days of Non-compete Agreements Numbered?

Non-compete agreements have been a part of the employment landscape of the US for decades. These employment contracts restrict employees’ ability to work in a particular industry once they leave a job. They often contain geographic prohibitions on where former employees can work and set out how long the agreement is in effect. The primary purpose of non-competes is to protect employers from workers who might take what they have learned and bring that to a new employer.

Many companies today use non-compete agreements to restrict worker mobility and slow the growth of wages. One of the main areas of misuse is when employers try to intimidate employees by having them sign non-competes when they know they are unenforceable. 

According to the Economic Policy Institute’s 2019 report, 31.8% of private sector businesses reported that all their employees had to sign a non-compete agreement, regardless of their job duties or compensation. Of the respondents with an average wage of less than $13/hour, 29% required all employees to sign non-compete agreements. But despite the broad use of non-competes agreements, the use of non-competes with low-wage workers has sparked a great deal of recent pushback.

State regulations

Non-compete agreements have always been governed solely by state law in the US, with no federal legislation regulating them. States have enacted a host of laws related to non-compete agreements ranging from California, which bans nearly all non-competes, to Florida’s law that makes all reasonable non-compete agreements enforceable. This has made it particularly difficult for companies working across state lines.

Executive action

On July 9, 2021, President Biden signed the Executive Order (E.O.) on Promoting Competition in the American Economy. This E.O. sets out a broad approach to encouraging competition in the U.S. economy. The Order’s provision on non-compete agreements empowers the Federal Trade Commission (FTC) to use its regulatory authority under the Federal Trade Commission Act to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

It appears from this E.O. that President Biden is not looking to eliminate the use of non-competes but instead intends to stop unreasonable abuses. The main focus seems to be protection for lower-wage workers to obtain higher wages and better working conditions.

Future federal legislation

While Congress has made many attempts to pass federal legislation, none have passed into law to date. Congress may pass federal legislation in the future which prohibits non-compete agreements for low-wage workers while still allowing for states to have laws that give greater protection to employees.

What employers need to know

Employers should take this opportunity to review how they currently protect trade secrets and other confidential information. It is important for employers to understand applicable state laws. Employers also may want to consider the use of nondisclosure or confidentiality agreements as alternatives to protecting proprietary information. Considering all the recent activity around this issue, employers need to make sure they use non-compete agreements in a reasonable, targeted, and narrowly tailored way to avoid future problems.

Want to learn more about the potential challenges facing non-compete contracts? Peacock Law can help. Contact your attorney at Peacock Law, or Justin Muehlmeyer, to have your questions answered. Justin Muehlmeyer can be reached at 505-589-3318 or JRM@PeacockLaw.com