MILWAUKEE, WI – The use of restrictive covenant agreements by companies to safeguard their business interests is facing scrutiny from federal and state governments. Despite bipartisan efforts in Congress falling short, federal agencies and state legislatures are actively pursuing measures to limit the implementation of such agreements.
In 2016, the Federal Trade Commission (FTC) and Department of Justice (DOJ) released their Antitrust Guidance for Human Resource Professionals, focusing on no-poaching and wage-fixing agreements that fall under antitrust law. This guidance allowed employers to defend their restrictive covenants by proving the necessity of protecting legitimate business interests. However, on January 5, 2023, the FTC changed its stance and issued a notice of proposed rulemaking (NPRM) that would ban non-compete clauses in employee agreements and supersede state laws with weaker protections. The proposed rule seeks to prohibit any contractual term that prevents workers from seeking or accepting employment after leaving their current employer. Non-disclosure and customer non-solicitation agreements would still be allowed unless they hindered a worker from working in the same field.
The NPRM received significant attention, with over 21,000 comments submitted. The final rule is expected to be released this year but would not take effect until 180 days after publication. Legal challenges are likely if the final rule remains unchanged from the proposed version. Critics argue that the FTC’s rulemaking authority under the Federal Trade Commission Act may be exceeded, and that the regulation interferes with contract law, falling within the jurisdiction of states. Congress may need to be involved in taking action to ban non-compete provisions.
The National Labor Relations Board (NLRB) General Counsel also expressed concerns over restrictive covenants. In March and May 2023, the NLRB issued memos identifying potential violations of the National Labor Relations Act (NLRA) in relation to non-compete, non-solicitation, and no-poaching clauses. The General Counsel’s opinion states that the “proffer, maintenance and enforcement” of non-compete agreements in employment and severance contracts go against the NLRA, except in limited circumstances. Companies have already faced Unfair Labor Practice charges based on this memo.
While federal agencies have shown an increased interest in restrictive covenants, the matter has traditionally been under state law. The FTC has encouraged states to ban non-competes through letters, although only California, North Dakota, Oklahoma, and Minnesota have fully prohibited such agreements between employers and employees. Almost half of all U.S. states, along with the District of Columbia, have enacted legislation related to restrictive covenants, with proposed bills continuing to emerge. State laws often focus on limiting restrictive covenants for lower-wage workers, with varying compensation thresholds. Several states and the District of Columbia have implemented notice provisions to protect employees from unknowingly signing agreements upon starting employment. Specific industries, such as healthcare, veterinary, and broadcast, have also been targeted with specialized legislation.
California, which has long banned non-competes, enacted further measures in 2023. Employers were required to notify current and former California employees, by February 14, 2024, that any non-compete provisions they entered into are void under Section 16600.1 of the California Business and Professions Code. Additionally, Section 16600.5 of the same code states that non-compete agreements are unenforceable regardless of where the contract was signed or the employment was maintained, as long as it pertains to California. This law allows employees to escape valid obligations by relocating to California after leaving their previous employment.
As state legislatures tighten their restrictions, state attorney generals have also been actively challenging employer-employee non-competes. Investigations and cases have been initiated by attorney generals in Illinois, New York, and Washington, accusing employers of exploiting non-compete agreements to restrict low-wage employees.
In light of these developments, companies must consider alternative methods for protecting their business interests. Non-disclosure provisions, non-solicitation provisions, and trade secret laws can be combined to create a multi-layered approach. Tailoring restrictive covenant agreements based on specific employee types and in compliance with state laws is also recommended.
Christine Bestor Townsend, a shareholder at Ogletree Deakins, stresses the importance of carefully navigating labor and employment issues. With expertise in trade secret and non-competition matters, Christine assists employers in complying with state and federal employment laws and represents them in legal proceedings.