President Biden’s Executive Order To Promote Competition May Ignite Congressional Action To Ban Non-Competes In Employment
Topics: Non-Compete and Trade Secrets
President Biden’s Executive Order on Promoting Competition in the American Economy includes a directive to the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” as a means to increase mobility of employees seeking higher wages.
While the FTC’s rulemaking process will take time before any regulations restricting non-competes are enacted, the Executive Order along with a groundswell of new state laws restricting and banning the enforcement of non-compete agreements in the employment sector could give impetus to the passage of the Federal Workforce Mobility Act (FWMA) that was re-introduced in Congress in March 2021 for the third time. The FWMA is a bi-partisan effort to create federal legislation to restrict the use of non-compete agreements between employees and employers that continues to sit with Congress. If enacted, the FWMA would create a federal scheme wherever interstate commerce exists to limit the use of non-competes to dissolution of partnerships and sales of a business and prevent enforcement of non-competes against most American employees.
The 2021 upswing in legislation at the state level to ban or limit non-competes and President Biden’s Executive Order will create momentum in Congress to pass the FWMA to establish a single national set of restrictions on non-competes in the workplace.
The first legislative effort in 2021 occurred when the District of Columbia enacted the most imposing statutory prohibition on non-compete agreements in the workplace as of that date. Under DC’s law, employers cannot enforce anti-moonlighting provisions, even if the employee seeks employment with a competitor or plans to operate a competing business. DC required employers to give notice to employees of the new law backed by statutory fines for lack of compliance, a private right of action to enforce violations and empowering the DC Mayor and the Attorney General to assess penalties for non-compliance against employers seeking to enforce non-competes.
It is notable that a few weeks later, the FWMA was re-introduced into the Senate on a bi-partisan basis.
On May 21, 2021, Oregon’s newest law was enacted to further limit the use of non-competes with Oregon’s employees. Under Oregon law, any non-compete is void and unenforceable unless it meets certain stringent requirements. Thus, a non-compete may only be enforced where (a) the employee earns in excess of $100,533/year (to be adjusted up annually), (b) the restricted period cannot exceed 12 months, and (c) agree in writing to provide the greater of (i) 50% of the employee’s compensation at the time of termination or (ii) $100,533 annually during the restricted period.
Nevada, long considered to favor enforcement of reasonable non-competes in the employment context, also, banned non-compete agreements with respect to any employees paid on an hourly basis, effective May 25, 2021. While it is not clear whether this law will apply to employees paid hourly who also receive bonuses, profit sharing or commissions, the price to attempt enforcement of an unenforceable agreement will require the employer to pay the employee’s attorneys’ fees and costs.
For several years, Illinois applied the “janitor test” against enforcement of non-competes of employees if the non-compete clause was so broad that it would preclude an employee from obtaining any employment, even that of a janitor, at a competitor. Further, it had legislation barring non-competes in the employment of certain low-wage workers. In June 2021, Illinois passed legislation, that Governor Pritzker is expected to sign, to expand Illinois’ previous restrictions against non-compete enforcement and prevent non-solicit agreements that may have been aimed at stopping talent raiding. Significantly, the new legislation will ban non-competes for any employee earning less than $75,000/year and ban non-solicits for employees earning less than $45,000/year (both of which will increase annually). However, for higher compensated persons, non-compete and non-solicit agreements may be enforceable when an employer agrees to provide at least two years of employment, or additional consideration in the form of undefined professional or financial benefits.
As more states create and change the laws banning or restricting the enforcement of non-compete agreements in employment there is an increasing tangle of state laws of which multi-state employers must be aware. Further, President Biden’s Executive Order and ensuing FTC regulations (and legal challenges to said regulations) may further complicate this analysis. We expect that due to the multitude of state laws along with FTC regulations, multi-state employers may find themselves in support of Congressional efforts to create a Federal law that establishes a single law or test governing the enforcement of non-competes in most future employment situations that fall under interstate commerce.
If you have questions how this Executive Order may affect your business, please reach out to your favorite CDF attorney or the author of this blog, Dan M Forman, Esq. We will continue to provide updates on these legislative efforts.