The Death of the Non-Compete Agreement?

President Biden made a big splash last week with an Executive Order announcing steps to restrict or limit non-competition agreements which are prevalent in the private sector. According to the Fact Sheet issued by the White House, roughly half of all private sector businesses require at least some employees to enter non-compete agreements, affecting some 36 to 60 million workers. The limitations imposed by those agreements, together with other economic barriers, have, in the view of the Administration, served to limit wages and worker mobility in a fashion that has negative economic consequences to individual families and the economy as a whole. So, does the Executive Order kill non-compete agreements as they now exist? To quote Monty Python’s Holy Grail: “Not Dead Yet!”

Looking behind the splashy headlines and into the Executive Order details, it is clear that non-compete agreements will be with us for the foreseeable future. Specifically, while the headlines and even the White House fact sheet proclaimed the Executive Order directed the Federal Trade Commission to ban or limit non-compete agreements, that is not really the case. In fact, the Executive Order itself is very limited, providing in section 5(g) the following action by the FTC:

(g) To address agreements that may unduly limit worker’s ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking 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.

“Consider working to exercise authority to make rules to curtail the use of unfair agreements” is not exactly the death knell of non-compete agreements. Indeed, a review of the Executive Order reveals no invalidation of existing agreements or even direction regarding what types of agreements are considered unfair. Furthermore, the rule-making process is typically long and arduous with any final rules subject to lengthy litigation. Consider the long path involved in President Obama’s directive to raise the minimum salary paid to those in professional, management or administrative positions resulting in modest raises that were half of those proposed and only several years after litigation stalled the Department of Labor’s planned implementation of new salary rules. Since many states have laws that specifically allow non-competition agreements that protect legitimate business interests, any rule proposing an outright ban on such agreements will likely face not only significant push-back during the rule-making process but litigation at the end of the process.

While the path ahead is far from clear, it is likely that any limitations on non-compete agreements will target the overbroad use of them in situations where the Employer is simply trying to keep its workforce in place rather than to protect trade secrets and other confidential information. Since some employees do have information that could clearly harm their former employer if disclosed to a competitor, it is unlikely that any new rules will give them the green light to do so and will likely preserve some limitations on post-employment work. Furthermore, it is unlikely that any new rules will limit confidentiality, non-solicitation and non-interference obligations that are designed to protect an employer’s legitimate business interests from unfair competition.

Employers that utilize non-compete agreements mostly to keep their workforce in place need to consider a future without such agreements and should proactively consider other means to accomplish retention such as retention bonuses given in the form of forgivable loans, training expense reimbursement provisions and other incentives for employees to stay put. In the meantime, existing agreements should be reviewed to make sure they are reasonable as to time and geographic scope and do not unduly limit competition by limiting an employee’s ability to use his or her general education, knowledge and experience for a new employer.

The Employment Law Team at Rhoades McKee can assist employers in designing employee retention programs and in keeping abreast of how the probable limitations on non-compete agreements arising from the President’s Executive Order will impact their existing agreements.