Thursday, March 30, 2023

President Issues Order Aiming to Limit Employer Use of Noncompetes

President Issues Order Aiming to Limit Employer Use of Noncompetes

President Joe Biden has asked the Federal Trade Commission (FTC) to ban or limit employment-related non-compete agreements as part of an executive order he signed on July 9.

The order includes 72 initiatives across many federal agencies and aims to “promote competition in the American economy, which will lower prices for families, increase wages for workers, and promote innovation and even faster economic growth,” according to a fact sheet released by the White House.

Employers generally use noncompetes to discourage employees from taking valuable trade-secret information to competitors, but lawmakers have sought to ban noncompetes with hourly workers in the retail and restaurant industries. Limiting employer use of noncompetes will make it easier for workers to change jobs and help raise wages, the White House said. The order also aims to limit occupational licensing requirements that may make it harder for workers to find employment when they move to a different state.

Michael Wexler, an attorney with Seyfarth in Chicago, noted that policies targeting non-compete restrictions on hourly and lower-wage workers have been sweeping across the country in recent years. “However, businesses and most states—even the most employee-friendly states—still recognize the need for restrictive covenants supporting the investment of time and resources by businesses to develop trade secrets and customer relationships which are vital to maintaining innovation, developing new products, and actually protecting existing employees”.

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Removing Barriers to Completion

The White House said that barriers to competition drive down wages. “When there are only a few employers in town, workers have less opportunity to bargain for a higher wage and to demand dignity and respect in the workplace.” Among other directives, the order encourages the FTC to ban or limit noncompete agreements, ban unnecessary occupational licensing restrictions and, along with the Department of Justice, strengthen antitrust guidance. No regulations have been issued yet.

States Typically Regulate Noncompetes

Noncompetition agreements and other employment contracts traditionally have been regulated through state law. California, North Dakota, and Oklahoma have banned non-compete agreements in most circumstances and nearly a dozen other states prohibit such agreements with low-wage earners. A broad federal rule would likely be challenged by businesses.

Protecting Confidential Information

Somewhere between one-quarter and nearly one-half of private-sector workers are subject to some kind of non-compete agreement, according to a study from the Economic Policy Institute. Proponents of eliminating the clauses argue that non-compete agreements—which bar workers from accepting new employment in their field or industry for a certain period, often a year or more after they leave an employer—reduce competition among businesses and stifle workers’ job mobility and wage growth. The clauses were first introduced to prevent upper-level employees from taking trade secrets to rival businesses but have since proliferated to low-wage and low-skill workers.

Many businesses have legitimate reasons for requiring workers to sign the agreements, and individualized assessments of the agreements that consider the industry and the geographical location should be conducted instead of an outright ban, said Beth Milito, senior legal counsel at the National Federation of Independent Business.

“Should noncompetes be limited … employers would have to consider new ways to protect their customer relationships, financial investments, business goodwill, and confidential information,” said Ana Dowell, an attorney in the Atlanta office of Ackerman.

President Supports PRO Act

The White House noted that the executive order aligns with Biden’s call for Congress to pass the Protecting the Right to Organize (PRO) Act, which the U.S. House of Representatives approved in March. If enacted into law, the bill would be the most expansive labor relations legislation since the National Labor Relations Act (NLRA) of 1935.

The legislation would, among other provisions:

  • Weaken right-to-work laws in 28 states by permitting unions to require workers at unionized companies to pay dues. Currently, employees in right-to-work states may choose not to pay union dues.
  • Greatly expand the definition of “employee” and almost expunge the concept of independent contractor.
  • Make it easier to establish that two or more employers are joint employers.
  • Prohibit class-action waivers in arbitration.
  • Expand damages under the NLRA.

The House also passed the PRO Act last year, but no action was taken in the Senate.