Compliant and well-written non-compete agreements simultaneously protect your former employees as well as your business, particularly against the disclosure of trade secrets or confidential information. Non-compete agreements limit an employee’s ability to conduct business in competition with their former employer or to use privileged/confidential information over an agreed-upon period of time and within a set geographic area. Often, this type of agreement – known as a “restrictive covenant” -- prevents the former employee from working in any significant role: as a contractor, owner, part-owner, investor, or employee for any organization that qualifies as competition. With this in mind, employers should err on the side of meticulousness to ensure that their definition of “competition” is clearly articulated and interpretable in their non-compete agreements.
Non-compete agreements are fairly common, with a Journal of Law and Economics study from early 2021 showing that 18% of employees in the United States have signed them at some point in their employment history. Interestingly, another report from the Economic Policy Institute found that although “well-paid, highly educated workers” have traditionally been associated with signing non-disclosure agreements, approximately 30% of businesses offering low-wage work (less than $13 an hour) require non-competes for employees, as well.
In this article, we’ll explore the ways that the Biden Administration’s 2021 Executive Order, as well as subsequent legal changes in certain states, have impacted the non-compete landscape, and how you can practically respond to protect your business interests in 2022 and beyond.
How the Issue Has Evolved
Although non-compete agreements have been a ubiquitous business practice for some time, in July of 2021 the Biden Administration issued an executive order designed to encourage the FTC to limit or completely eliminate non-compete agreements. Despite the order’s framing as an effort toward “Promoting Competition in the American Economy,” significant opposition from the business community followed the announcement and now, many companies are awaiting further announcements regarding FTC plans or actions.
To date, the FTC has not implemented a new policy or rule related to non-competes, but the executive order has influenced legal and political action on federal and state levels. Soon after the Biden administration’s announcement, Congress introduced the Freedom to Compete Act, which amends the Fair Labor Standards Act of 1938 and aims to prevent employers from “enforcing or threatening to enforce any non-compete agreement contracts with certain entry-level, lower-wage workers.” For now, the Act has not passed and has been relegated to review within the Senate Health, Education, Labor and Pensions Committee.
Nevertheless, a number of states have amended their laws in order to alter the use of non-compete agreements. As just one example, Illinois now prohibits employers from requiring non-compete agreements from employees who earn $75,000 or less annually. Employers are also prohibited from requiring non-solicitation agreements from employees earning $45,000 or less yearly. The amended law also requires that employers give employees 14 calendar days to review non-solicitation or non-compete agreements prior to signing them. Additionally, employers must (in writing) recommend that each employee seek legal counsel before signing either agreement. In Illinois’ amended law, the definition of non-solicitation and non-compete agreements is quite broad, without language distinguishing prohibitions on competitive conduct mid-employment vs. post-employment, which naturally causes more interpretive difficulties for businesses, as well as concrete concerns regarding competition and loss of institutional knowledge.
With these shifting state policies and the looming possibility of concrete federal action in mind, many employers are closely reevaluating their non-competes to ensure compliance with state laws as well as language that ensures protections for their business.
Below, we’ll offer some guidance on the practical steps you can take to keep your existing non-competes compliant and effective for your business. We’ll also consider the ways you can strategize for adaptation in the event that federal legislation partially or wholly bans non-competes in the near future.
Steps Towards Adaptation
- Review Recent (or Forthcoming) Changes to State Laws – We’ve already explored the new restrictions in Illinois, but other states and districts like Oregon, Colorado, Nevada, and Washington D.C. have also legislated change, while New York, Connecticut, and West Virginia all have House or Senate Bills under consideration. Take the time to review the changes (proposed or enforceable) in your state or area, and consider how you will adapt your business strategy if the changes impact your operations.
- Determine Whether Non-Competes Are Integral to Your Business – Evaluate whether non-compete agreements are crucial to your company’s operations. In the event of a federal ban, it might be possible to implement other provisions ranging from confidentiality agreements, non-solicitation agreements, or non-interference obligations to protect your business and transfer some of the key components of your current non-competes to a new agreement
- (Re)evaluate the Language in Your Non-Competes – Review your current non-compete language to determine if any phrasing or points of emphasis should be modified to protect your business interests. Avoid any vagueness and limit the possibility of misinterpretation regarding key points. As we mentioned earlier, definitions of “competition,” geographical limitations and/or job types required by the company to enter into non-competes, are all subjects that must be precisely articulated.
- Gauging Fairness - Regardless of pending changes to federal or state law, consider whether your non-compete agreements are fair, impacting the correct job types, narrow enough to address the specific/most necessary concerns, and tonally appropriate.
- Incentivize New Agreements – If possible, consider whether you can offer incentives to employees who sign non-competes or other agreement types you adopt (confidentiality agreements and otherwise). Additional leave is one possible form of incentive, but consider what might be most appealing to your employees.
- Refine Exit Interviews – During exit interviews, remember to remind employees that they have signed a non-compete agreement. Highlight the major points with them prior to their official exit from your company (limitations, timeline, geographic restrictions, etc.). By respectfully revisiting the original agreement, you ensure that both parties avoid future legal issues.
How CAVU HCM Can Help
Navigating the shifting terrain of non-compete agreements is an increasingly complex and daunting task, but updating your practices to ensure compliance, fairness, and the protection of your business interests, is more than achievable with the right help.
CAVU HCM offers the guidance, expertise, resources, and software necessary to help you achieve all of the following and more:
- Craft a compliant non-compete agreement that aligns with your state’s laws and your company’s needs
- Formulate useful alternatives to non-compete agreements: confidentiality agreements, non-solicitation agreements, or non-interference agreements that incorporate the key features of your past/current non-competes
- Manage hiring, payroll, time and labor, pay equity and other HR concerns with your state or district’s labor laws in mind
- Ensure your business is protected from exposure to penalties and liability, and your policies are fully compliant across position types (salaried, exempt, etc.).
Looking for a payroll solution that’s built for your business? Led by experts on state and federal policies, CAVU HCM’s payroll solution is the perfect fit. Let us manage your entire payroll process including time and attendance, yearly filings, application of tax credits, and more, to stay compliant with the latest labor law updates, including those related to non-competes. To start the conversation or get a quote for our services, please contact us today.