By Bill Swan, Principal Consultant
In January 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban most non-competes in the United States, which could affect 55% of US employers. Non-competes are defined as agreements between employers and workers (including independent contractors, interns, and even volunteers) that “block the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.” Following the announcement, the public had 60 days to comment on the proposal. To date, the final ruling has not been posted.
Currently, Washington state has a restriction tied to income level. Colorado, Illinois, Maine, Nevada, Oregon, Virginia, Wisconsin, and Minnesota have restrictive non-compete laws, and California, North Dakota, Oklahoma, and Washington, D.C. have banned them entirely. New York passed a bill earlier in 2023 that would ban non-competes and awaits the Governor’s signature. Other state legislatures are proposing or pending legislation.
But if states are addressing non-competes, why the proposed federal ruling?
According to the FTC, about 30 million Americans out of the 167 million in the workforce (18%) are held to non-compete agreements, and around 38% of all workers have been held to the agreements during their working careers. The agency believes that a ban on non-competes could expand career opportunities for those affected, improve domestic innovation and competition, and increase wages by $300 billion per year.
Per the FTC, “Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not.” The FTC believes non-competes are stifling healthy entrepreneurship and innovation by preventing workers from beginning businesses that would otherwise more naturally enter the market and add to the economy. The FTC Act Section 5 prohibits unfair methods of competition and unfair practices affecting commerce. This part of the Act is particularly being cited in support of the FTC view.
What is an employer to do in the meantime and in the climate of legislation and court decisions opposing non-competes?
- Review what it is the company is trying to protect: Where non-competes are permissible, they must only be in cases where legitimate business interests are being protected. Such concerns may include trade secrets, sensitive information, specialized training, and client relationships. The company needs to articulate and reasonably defend its position, and it needs to comply with the jurisdiction in which it operates.
- Review what the laws are in the state where your company operates: like other laws, what is permissible varies from one state to the next. If you are a multi-state employer, you need to review the requirements in each state in which you operate. “Off-the-shelf” or generalized non-compete agreements are not likely to be equally enforceable across jurisdictions.
- Which employees really need to sign? In Washington, as in some other states, a salary threshold must be met for the non-compete to be enforceable. If the position of the person cannot be shown to be a reasonable threat to the business upon their departure, the agreement is unenforceable. States such as Washington have tied enforceability to salary levels.
The landscape of non-competes is changing, and it is an area to which employers should pay attention. If your company needs help, FIT HR may be able to assist, or we recommend you contact legal counsel for an in-depth discussion and review of your agreements. FIT HR works with many reputable attorneys and would be happy to make an introduction. Contact us anytime.