President Biden’s Executive Order Takes Aim at Employee Non-Competition Agreements
In a significant Executive Order issued on Friday, July 9, 2021, President Biden launched what the White House is calling a “whole-of-government effort to promote competition in the American economy.” Through 72 new initiatives and the coordination of more than a dozen federal agencies, the Order promises to deliver tangible benefits to workers.
One of the areas most impacted by the Order will be employee mobility and competition. Aiming to improve worker mobility, President Biden encouraged the Chair of the Federal Trade Commission “to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may limit worker mobility.” Although it has been suggested that the Order bans non-compete agreements, it merely encourages the FTC to consider imposing limits on the use of them.
When President Biden signed the Order, he emphasized that non-compete agreements are not limited to highly-compensated workers or scientists who know their employers’ “secret formula.” White House Press Secretary Jennifer Psaki noted in her remarks concerning the Order that approximately fifty percent of private sector business require employees to enter into non-compete agreements, which impacts over 30 million US workers. She noted that the restrictions “affect[t] construction workers, hotel workers, many blue-collar jobs, [and] not just high-level executives.”
The Order also specifically targets anti-competitive behavior by the tech industry. In particular, the President demands enhanced scrutiny of mergers, especially the acquisition of new competitors by established companies, and the accumulation and use of user data. The FTC is directed to take the lead on these initiatives and is expected to take up issues of internet marketplace competition and consumer device repair as well. Through other agencies, the Order is also extending the enhanced scrutiny of mergers and consumer data usage to the areas of banking and finance.
With respect to non-competition agreements, the Order is the most recent in a series of federal and state efforts to curb the use of them by employers. During President Obama’s administration, the White House issued a “call to action” and set of best practices to curb the overuse and misuse of non-compete agreements “that are hurting workers and regional economies,” including:
- Banning non-competition agreements for certain categories of employees, including low-paid employees, employees working in jobs that promote public health and safety, and employees who are unlikely to possess employer trade secrets;
- Limiting non-competition agreements to situations where the contracting process is fair and transparent, such as prior to a job offer or major promotion; and
- Incentivizing employers not to seek overly broad non-compete agreements by prohibiting “blue-penciling,” which allows a court to re-write them to exclude unenforceable provisions.
In the past several years, many states, including Illinois, Louisiana, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington and the District of Columbia, have enacted laws that restrict the use of non-competition agreements. Although none of these recent provisions is identical, they typically include the following types of restrictions on non-competition agreements: (1) prohibiting them for low-wage workers; (2) restricting their use in certain industries, such as health care workers; (3) requiring employers to disclose the terms of the non-compete before making an offer; (4) requiring employers to compensate laid off employees who are subject to non-competes; and/or (5) limiting the scope or duration of non-compete agreements.
Federal efforts, however, have not been as successful. For the past several years, a group of members of Congress, including Senators Tim Kaine, Kevin Cramer and Todd Young, have proposed legislation that would curb the use of non-competition agreements. The Workforce Mobility Act, introduced in the House and Senate in February 2021, seeks to ban non-competition agreements across all industries and income levels, much like the restrictions in California and North Dakota. It only provides narrow exceptions for the sale of goodwill or an ownership interest in a business or the dissolution of a partnership. Much like prior efforts, however, the proposed legislation has not gained much traction.
Bertram LLP represents executives and professionals in transition and facing career challenges, including providing advice concerning and litigating claims concerning non-compete agreements and other post-employment restrictions. As this article reflects, state law concerning restrictive covenants has changed dramatically over the past five years and federal law may impose new restrictions. It is important for executives and professionals to understand the restrictions that are being proposed by an new employer and that apply to them in their current employment as they are transitioning out so that they can avoid or mitigate the risk of costly and disruptive litigation.