Initiatives Include Ban On Non-Compete Agreements
On July 9, 2021, President Biden signed an Executive Order (“EO”) directing potentially seismic changes in the nature of relationships between employers and their employees. The “Executive Order on Promoting Competition in the American Economy,” as it has been labeled by the White House, articulates dozens of wide-ranging directives and initiatives intended to “lower prices for families, increase wages for workers, and promote innovation and even faster economic growth.” That this is a priority of the Biden Administration comes as no surprise. However, some of the concepts introduced in the EO are more ambitious than many observers had anticipated, and will have a profound effect on employer-employee relations once implemented.
One such initiative in the EO is the White House’s “encouragement” that the Federal Trade Commission (“FTC”) utilize its authority to promulgate new rules curtailing the “unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” In no uncertain terms, President Biden is asking the FTC to make it easier for workers to move from one job to another, and the White House provided an explanatory fact sheet stating that the president seeks to “ban or limit non-compete agreements.”
Federal Ban On Non-Compete Agreements
While this is not the first time that the federal government has waded into this issue, a federal ban on non-compete agreements would give workers unprecedented mobility, and would deal a significant blow to employers’ ability to curtail enhanced competition created by their former employees moving to direct competitors or founding their own competing businesses within the same industry. Currently, the enforceability of non-compete agreements is determined by state law. It is almost certain that any attempt by the federal government to create a nationwide ban on the use of restrictive covenants for employees will be met with stiff resistance from the business community, and any FTC statutes providing for such restrictions will be challenged in the courts.
The impact on employers of a federal ban on the use of non-compete agreements will vary from state to state. Employers operating in states where enforcement of non-compete agreements is already severely limited or prohibited under state law (for example, California) will notice very little change. However, a majority of states permit the enforcement of non-compete agreements, subject to restrictions aimed at ensuring the basic fairness of the scope of these agreements with respect to such factors as the length of time and breadth of the geographic area to which they are purportedly applicable. In these states, the impact of the proposed FTC rules will depend upon the “floor” created by the federal statutes. If these statutes provide more protection for the employee than the applicable laws in a given state, then any non-compete agreement that fails to meet the federal guidelines may be deemed unenforceable.
It is likely that the FTC rulemaking process will take months to complete, and that the anticipated legal challenges could add additional time before these rules take effect. Nevertheless, employers should consult with their legal counsel to evaluate the impact these new federal regulations may have on their businesses, including determining which existing non-compete agreements might be affected, as well as evaluating whether these agreements will provide the desired protection of their legitimate business interests moving forward.
The Lynch Law Group will continue to follow and provide updates on these and related developments.
Pittsburgh Employment Attorneys
In light of the directives outlined in President Biden’s Executive Order on Promoting Competition in the American Economy, employers wishing to discuss strategies to protect their business interests are invited to contact James McGraw at jmcgraw@lynchlaw-group.com or by phone at 724-776-8000.
