The Biden administration recently issued an “Executive Order on Promoting Competition in the American Economy” that takes aim at non-compete provisions in employment agreements. The Executive Order specifically encourages the Federal Trade Commission (FTC) to restrict non-compete provisions, and thus, facilitate the transition of workers between jobs. The aim of the Executive Order is to enhance competition in the workforce and promote economic growth in the U.S.
What is a Non-Compete?
A non-compete agreement, also known as a restrictive covenant or covenant not to compete, is a contractual agreement in which one party (generally an employee) agrees to not enter or start a similar profession or trade in competition against another party (generally the employer). Employers have a strong interest in protecting the intimate knowledge an employee gains by working at their business, while employees have a strong interest in the right to work and enjoy free enterprise. This conflict has led some states to completely ban non-competes and all states to tightly regulate the parameters of non-competes, limiting them in scope, time, and area.
States that currently ban non-compete agreements include:
- North Dakota
- District of Columbia (to a large extent)
A number of other states prohibit or significantly limit non-competes with respect to low-wage workers, such as Illinois, Oregon, Nevada and Virginia, among other states.
What does this Executive Order mean for employers?
While the Executive Order does not immediately change existing laws on non-competes, employers should prepare for potential state law restrictions on non-competes in the future. States generally follow the federal government’s guidance with respect to these provisions, and employers should consider the following steps to protect themselves in the event that a non-compete is not enforceable in employment agreements.
- Protect confidential and proprietary information
Employers should review existing employment agreements with employees and consider enhancing confidentiality and non-disclosure provisions on those agreements. Employers generally utilize non-competes to protect their proprietary and confidential information by preventing employees from working for competing businesses in a certain geographic region for a certain amount of time. By asking employees to sign non-disclosure agreements (NDA’s), and confidentiality and proprietary information provisions, employers may achieve the same goal of protecting their proprietary and confidential information from disclosure and breach.
- Review non-solicitation clauses and other language
Employers should review existing employment agreements with employees and consider including non-solicitation clauses. Non-solicitation clauses are contracts between an employer and employee that govern the employee’s right to solicit customers or other employees of the business after he/she leaves his/her employment. The duration and geographic scope of non-solicitation contracts may be broader than in a non-compete provision. Also, non-solicitation clauses are often considered more enforceable than a non-compete provision.
- Provide consideration
Employers should include language that clearly states the consideration offered in exchange for an employee signing off on a non-compete. Since non-competes, non-solicitation, and other non-disclosure provisions are restrictions on employees, the employer should clearly state the compensation or anything else that is provided in exchange for such restriction on the employee.
- Be reasonable
Employers should include reasonable time and geographic limits on any non-compete language in the employment agreement. The Executive Order asks for “unfair” use of non-compete clauses to be limited. Employers should be careful to not include overly broad geographic restrictions on employees, and multiple year durations for their non-compete provisions, as courts may not view those burdensome restrictions favorably.
- Always check your state’s laws
Employers should make sure that they are aware of applicable state laws. It is helpful to work with attorneys on this issue. California, North Dakota and Oklahoma have banned non-compete agreements in most cases, while a new law in Washington D.C. will ban the use of non-competes in many cases, with some exceptions.
Almost a dozen other states prohibit non-competes with respect to lower-earning workers and hourly employees. Massachusetts, for example, does not permit non-competes for certain professionals such as nurses, physicians, social workers, and employees in the broadcasting industry.
Additionally, in some states, if an employee was laid off, the non-compete is also invalid.
While the Executive Order does not directly and immediately impact state laws, it may influence states in the future and employers should prepare now for potential changes ahead. Lengea Law has reviewed many employment agreements for businesses, and is available to help with drafting and reviewing employment agreements to ensure that your medical spa or physician practice is protected in this constantly changing legal landscape.