The Future Of Noncompete Agreements

On July 10, 2021, President Biden signed an executive order, asking federal agencies to implement actions designed to increase economic competition and limit the use of noncompete agreements.

According to the President, “Workers should be free to take a better job if someone offers it. If your employer wants to keep you, he or she should have to make it worth your while to stay. I didn’t know until five years ago the incredible number of noncompete clauses for ordinary people that are done for one reason: to keep wages low, period.” He went on to say that noncompete agreements make workers feel powerless, disrespected, bullied, and trapped; and “that’s not right.”

Several states already agree. Noncompete agreements have been unenforceable in California, North Dakota, Montana, and Oklahoma for nearly every type of employee, for many years.

Washington D.C. now prohibits noncompete agreements that bar an employee from simultaneously or subsequently working for another person or for themselves.

Virginia, Illinois, and Maryland prohibit or limit noncompete agreements for low-wage workers (each state having its own definition of “low wage”).

Hawaii prohibits or limits enforcement of noncompetes for IT workers.

New Mexico, New Hampshire, and Texas prohibit or limit enforcement against physicians.

Massachusetts requires employers to provide workers with at least 50% of their salary during the restricted period of their noncompetes and bars the use of noncompete agreements for lawyers, physicians, nurses, social workers and broadcasters.

These state prohibitions do maintain protections for employers’ confidential information and trade secrets.

Despite the recent proposals for federal regulation of noncompete agreements, there is no clear view of the future. The Biden administration needs to first clarify the scope of the FTC’s rule-making power, for which there has been no consensus. Then, if given the go-ahead, the FTC will have to decide whether to make noncompetes illegal, or simply unenforceable; and whether any rule will be retroactive.

If the future includes a national FTC-ban on noncompete agreements, there will undoubtedly be legal challenges. While the U.S. Supreme Court generally gives deference to federal agencies, rules will be struck down if deemed unconstitutional. So for now, employers interested in controlling their workforce through the use of noncompetes should keep an ear on the conversation and perhaps prepare for a future that encourages employers to give employees more incentive to stay than reason to leave.