Changes Ahead for Non-Compete Agreements

Be prepared for some important changes-if not an outright federal ban- on non-compete agreements.

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In what many are calling a significant move, the Biden administration has issued an Executive Order (EO) to ban or limit non-compete agreements nationwide. The order seemingly fulfills a promise made last year by then presidential candidate Joe Biden to eliminate all non-compete agreements. It also means that distributors and manufacturers should begin examining their existing non-compete agreements.

A non-compete is a type of employment contract and restrictive covenant that limits an individuals ability to work in a particular industry. Almost all non-compete agreements have limits on geographical location and length of time theyre in effect.

These types of agreements are prevalent in many industries including, construction, industrial and tech segments.

In a fact sheet provided with the executive order, the White House explained that the purpose of the EO14036 was to make it easier to change jobs and help raise wages by banning or limiting non-compete agreements and unnecessary, cumbersome occupational licensing requirements that impede economic mobility.”

The White House described non-competes as one way companies stifle competition” and stated that roughly half of private-sector businesses require at least some employees to enter non-compete agreements, affecting some 36 to 60 million workers.”

However, the EO does not have any immediate impact on non-compete agreements. Currently, non-competes are regulated only at the state level through statutes and common law. 

Biden's Executive Order does not ban the practice outright. Instead, it directs the Federal Trade Commission and other federal agencies to draft their own rules — a process that will likely take many months.

For Some, Action Limited at the Local Level

Currently, three states refuse to enforce non-compete agreements against employees: California, Oklahoma and North Dakota

Regardless, the days of non-competes could be numbered. While their use may not be completely banned, continued limitations are likely from individual states, even without the help of President Bidens EO.

California outright prohibits non-compete agreements for all employees. Despite this clear prohibition, a survey by the Economic Policy Institute (EPI)  said many California employers still require employees to sign non-compete agreements. Although these agreements are unenforceable, employees who do not know about the California law may refrain from seeking employment in order to avoid violating the terms of the agreement. 

Frederic Mendelsohn, a well-known lawyer based in Chicago and a columnist on legal issues for Industrial Distribution, recently said the courts or the legislative bodies in various states are becoming increasingly wary of non-compete agreements as opposed to lesser confidentiality agreements.

“The Executive Order is the only federal action that I am aware of that would affect non-compete agreements. Most are state-driven,” he said.

The Illinois legislature, for example, recently introduced a bill seeking to prohibit the use of covenants not to compete for all Illinois employees, regardless of an employee’s salary, according to NationalLawReview.com.

“A lot of states are saying now that if you’re not fired for cause, riffed, or laid off that these restrictive covenants are not enforceable,” Mendelsohn said.

The Costly Reality of Pursuing a Case

A friend of mine, a sales representative for a medical supplies firm, found himself in the throes of a non-compete when he left his outside sales job. Before exiting, he was reminded that the company would enforce his signed non-compete agreement.

The agreement said he could not work for a competitor in a specific geographical area for one year. He didn’t work in his field for two months but after talking to a lawyer he went to work for a competitor. His old company never challenged him.

“My wife and I were pretty worried  that my former employer would come after us,” he said. Fortunately, his old company did not try and enforce the non-compete agreement.

Mendelsohn points out that it is imperative for employers to work closely with their legal counsel to ensure their non-competes are in compliance  with existing regulations, particularly with many changes taking place under state actions.

But Mendelsohn, like other lawyers, warns companies not to make such non competes so restrictive that it could impact an employee’s  ability to earn a living.

And if a company does try and enforce a noncompetitive agreement, it should stop and take a look at what it’s going to cost them. Mendelsohn pointed out that it could cost upwards of $100,000 to take a former employee to court, particularly if they need to take additional steps such as seeking a temporary restraining order.

In the old days, he notes, the test for courts was simple: Did the employee have access to any confidential information and utilize that information in his or her new job?

Now that has expanded to cover a host of other reasons.

If you’re thinking of establishing a non-compete for your employees, companies are advised to keep the restrictions “reasonable and narrow.”

Courts will review a non-compete to ensure it does not interfere with the public interest (as set out in state law/state court decisions) or impose an undue hardship on the employee. This analysis includes reviewing the non-compete agreement for reasonableness as to geography and time, according to BusinessLawToday.org.

It is also recommended that a provision be included that gives the employee time to consult with an attorney to review the agreement before a signature is required (including a place for the employee to initial that section). This will help with enforcement.

Jack KeoughJack KeoughBut the real questions employers should be asking: Do I need a non-compete for my employees? What is my state’s policy regarding enforcement of non-compete?  Am I willing to spend the time and money to try and enforce a non-compete?

Stay tuned as the Biden administration continues on the path toward banning or limiting non-competes.


Jack Keough is president of Keough Business Communications. He was editor of Industrial Distribution for 26 years. You can reach him at john.keough@comcast.net

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