Non-compete agreements or similar clauses in employment or severance contracts are nothing new, but since 2021, business attorneys have noticed a distinct downward trend in their use and a contemporaneous uptick in public hostility towards them. Usually handled by judges on a case-by-case basis, there is now a concerted effort by state legislatures and the federal government to challenge the validity of non-competes. Throughout 2023, the overall number of these challenges has risen, with many states passing new bans and federal agencies asserting that the majority of non-competes are illegal and should be disallowed.
Over the years, judges nationwide have gradually eroded the scope of non-competes, causing uncertainty for both employers and employees about what constitutes a valid and enforceable agreement within each state’s legal framework. The notion of a universal, one-size-fits-all agreement is no longer practical.
States are taking the lead in either banning or restricting non-competes. Various legislatures have entered the debate, seeking to define or formalize acceptable parameters for such clauses. Approaches differ, with some states outright prohibiting non-competes, while others allow them with restrictions, especially for lower-wage workers.
Currently, California, North Dakota, Oklahoma, Minnesota, and New York have effectively banned all non-competes, with limited exceptions. Maryland, Virginia, and Washington, D.C., among others, prohibit non-competes for lower-wage earners, each with its own specific threshold. Violations of these statutes can result in civil or criminal penalties for employers.
At the federal level, both the National Labor Relations Board (NLRB) and the Federal Trade Commission (FTC) have proposed rules that could render non-competes void and unenforceable nationwide for employees covered by the National Labor Relations Act or the Federal Trade Commission Act. The NLRB has taken a strong stance against broad non-competes, asserting that they violate the NLRA, except in limited circumstances. The FTC’s proposed rule, if enacted, would make almost all non-competition agreements unlawful under the FTCA, applying to a wide range of workers nationwide.
While these federal efforts could lead to a nationwide ban on non-competes, they don’t exempt employers from complying with state laws. The FTC’s proposed rule, for instance, has not yet become law, and its fate depends on the agency’s decision after public comments and potential legal challenges.
In conclusion, the growing opposition to non-competes at both federal and state levels underscores the need for employers to exercise caution. If your company currently uses non-competes with your employees, you may need to seek counsel regarding their enforceability in 2024 and beyond.
As always, if you have any questions about buying or selling a business or business law generally, please don’t hesitate to contact us!