New Executive Order Signals Potential Action on Non-Compete Agreements
On July 9, 2021, President Biden issued an Executive Order establishing 72 initiatives aimed at promoting competition in the American economy, lowering consumer prices, increasing worker wages and promoting innovation and economic growth. A Fact Sheet accompanying the order declares that “tens of millions of Americans—including those working in construction and retail—are required to sign non-compete agreements as a condition of getting a job, which makes it harder for them to switch to better-paying options,” and suggests that one goal of the order is “to ban or limit non-compete agreements.” However, the actual language of the order is more modest and encourages the Federal Trade Commission to utilize its rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
While the order does not immediately impact the use of non-compete agreements, it reflects a groundswell of efforts to limit or eliminate non-competes. Three states—California, North Dakota and Oklahoma—largely ban non-compete agreements. Nearly a dozen states limit or prohibit the use of non-compete agreements for certain categories of workers. For example, Virginia recently passed a law prohibiting non-compete agreements with certain “low wage” employees and the District of Columbia has passed (but not yet put into effect) a sweeping prohibition on non-compete agreements. These efforts have been mirrored in the federal legislative sphere. On February 25, 2021, Sens. Chris Murphy and Todd Young and Rep. Scott Peters re-introduced the Workforce Mobility Act in the U.S. Senate and House of Representatives. This bill, if it becomes law, would prohibit the use of non-compete agreements except in instances of a dissolution of a partnership or sale of a business and require employers to make employees aware of this limitation on non-compete agreements. On July 21, 2021, Sens. Maggie Hassan and Marco Rubio re-introduced the Freedom to Compete Act in the U.S. Senate. This alternate bill mirrors recent state efforts and, if it becomes law, would prohibit an employer from enforcing, or threatening to enforce, non-compete agreements with certain entry-level, low-wage employees.
The bottom line is that non-compete law is in flux and additional changes are expected, yet difficult to predict. Given the evolving nature of these issues, employers should consider reviewing their existing non-compete agreements to ensure compliance with state law and avoid relying on old form agreements that may no longer be consistent with applicable law.
If you have questions related to this alert, please do not hesitate to contact any member of the Non-Compete and Trade Secrets group or your regular Smith Anderson lawyer.