On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, which encourages the Federal Trade Commission (FTC) to ban or limit noncompete agreements.
The executive order is part of a broad push from the administration to promote competition to stimulate economic growth by lowering prices, increasing wages, and boosting innovation.
What are Noncompete Agreements?
Noncompete agreements, sometimes called restrictive covenants, are designed to protect a company’s trade secrets and proprietary information by limiting specific employee behavior. Often presented as a condition of employment, noncompete agreements prevent employees from going to work for a competing business, or starting a competing business, for a certain period of time following employment and often within a defined geographic area.
While noncompete agreements are typically thought of as an employer tool for use with executives, sales and business development staff, and highly specialized employees, they surprisingly affect a large number of low-wage workers. According to a study by the Economic Policy Institute, 29 percent of responding private sector workplaces where the average wage is less than $13.00 per hour use noncompete agreements for all workers.
State Noncompete Rules
California, North Dakota, Oklahoma, and Washington D.C. ban noncompete agreements, and several more prohibit them for low-wage workers. Some states also make it difficult to enforce these agreements.
After reaching settlements with attorneys general offices in Illinois and New York, fast-food franchise Jimmy John’s ceased including noncompete agreements in its hiring documents. The noncompete agreements barred departing employees from accepting employment with competitors for two years and within a two- or three-mile radius of any Jimmy John’s store.
What Should Employers Expect?
It seems unlikely that the FTC will issue a comprehensive rule governing the ban on noncompete agreements. Any attempt to impose a ban would result in strong opposition from the business community and potential legal battles. What we may see, however, are restrictions on noncompete agreements for low-wage workers or maximum time limits.
While we may be waiting months for the FTC to issue new rules, it provides employers the time to review noncompete agreements for the appropriate balance between protecting trade secrets and proprietary information and alignment with state laws, current legal precedent, and potential new federal rules. Reassess whether noncompete agreements are needed for certain employees and whether you can reduce the scope of the agreement in terms of length of time or geographic area.