Will We See the End of Non-Compete and No-Poach Agreements under the Biden Administration?

February 26, 2021 Restrictive Covenants

Employers have relied for decades on non-compete and no-poach agreements to try to prevent former employees from misusing trade secrets and disrupting client relationships.  Non-compete agreements are agreements between an employee and an employer, which usually prohibit the employee from engaging in the same or similar line of work for a specified period, typically one or two years.  Conversely, no-poach agreements are agreements between employers agreeing that they will not hire the former employer’s employees. 

States’ Efforts To Regulate

For employees, both types of agreements have the impact of limiting competition and stifling employees’ mobility.  Employers believe these agreements are necessary to protect client information, customer relationships, and trade secrets.  Over the last several years, these agreements have come under increased scrutiny for various reasons.  A number of states have enacted laws restricting the use of them, particularly for lower wage-earning employees.

Last month, Washington, D.C. passed D.C. Act 23-563, known as the Ban on Non-Compete Agreements Amendment Act of 2020.  Among other things, the newly passed DC bill prohibits:

  • An agreement (or provision) between an employee or employer that bars the employee from simultaneously or subsequently being employed by another person, performing work or providing services for pay for another person, or operating the employee’s own business.
  • An employer from maintaining a workplace policy that prohibits the same.

Likewise, neighboring states Virginia and Maryland have also banned certain non-compete agreements.  Virginia prohibits non-compete agreements for low-wage workers (defined by a calculation, but roughly equates to those who make less than approximately $1,100 a week).  Maryland prohibits non-compete agreements for those employees who make $15 an hour (or less) or $31,200 annually.  Virginia and DC also provide for penalties for violating the laws, as well as a private cause of action for the aggrieved individual.  All three of these laws exclude employment provisions that protect client and proprietary information. 

DOJ’s Approach With Non-Compete and No-Poach Agreements

No-poach agreements allegedly violate anti-trust principles because they breakdown the free and open work markets.  According to 2016 guidance from the Department of Justice (DOJ) and the Federal Trade Commission (FTC):

  • firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services.  It is unlawful for competitors to expressly or implicitly agree not to compete with one another, even if they are motivated by a desire to reduce costs.

This extends to agreements between employers to fix wages.  Simply put, wage-fixing occurs when employers agree between themselves that they will pay certain positions a specific salary within the same competitive market, thereby restricting an employee’s ability to freely move to another organization within the same industry.  Take, for example, two restaurants within a particular geographical area agreeing to set the salary for managers at $35,000.  This may dissuade a manager from seeking employment elsewhere because there are no enticing opportunities within that geographical location. 

In December 2020 and January 2021, the DOJ filed its first two criminal cases against employers whom it says either engaged in criminal wage-fixing or no-poach agreements.  In the first case, U.S.A. v. Jindal, Case No. 4:20cr358 (E.D. Tex. Dec. 9, 2020), Jindal, an owner of a therapist staffing company, was accused of spearheading a conspiracy between other staffing companies to fix the prices for physical therapists and physical therapist assistants they employed – a violation of the Antitrust Act.  The indictment indicates that the conspirators formed an agreement via text messaging to suppress physical therapists’ and physical therapist assistants’ wages so that the companies’ profit margins could increase.  Jindal is also charged with obstructing proceedings before the Federal Trade Commission (FTC), which was administratively investigating these proceedings, by allegedly making false statements and withholding and concealing information necessary for the investigation.

In the second case, U.S.A. v. Surgical Care Affiliates, LLC, Case No. 3:21cr0011 (N.D. Tex. Jan. 5, 2021), the DOJ alleges that the company violated Section 1 of the Sherman Act by agreeing with other companies to not solicit each other’s senior-level employees.  In other words, the companies entered into a no-poach agreement, despite the fact that they were competitors in the recruitment and retention of senior-level employees.  This, according to the DOJ, suppresses competition, which in turn, violates the Sherman Act.  The companies involved in the conspiracy, according to the DOJ, instructed executives, employees, and recruiters not to solicit senior-level employees of each other’s companies.  Such instructions went so far, according to the DOJ, that if a senior-level employee wanted to apply elsewhere, he or she would have to tell their boss that they were looking and wanted to leave.  If this was not done, the other employers would not speak with the senior-level manager about potential opportunities. 

Both cases are still pending, but employers should be mindful that wage-fixing and no-poach agreements can lead to lengthy and costly civil and administrative actions.   

What’s Next?

Just last year, the FTC held a workshop entitled, Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues, collecting information on the usage of both types of agreements.  During the meeting, Acting Chair Rebecca Slaughter emphasized that a handful of states have begun pushing back against non-compete restrictions and passing legislation limiting their use, but more work had to be done.  To that end, she hinted about the FTC using its regulatory authority to enact regulations to combat businesses’ using these types of agreements.

President Biden (then candidate) issued his Strengthening Worker Organizing, Collective Bargaining, and Unions plan during his presidential campaign.  In this plan, he expressly called for the elimination of “non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers.”  The premise behind such a plan appears to be the fundamental principle that “[i]n the American economy, companies compete [and as a result] [w]orkers should be able to compete, too.” 

Now that the Democrats have taken control of Senate committees, we may see more traction by way of legislation seeking to eliminate or severely weaken companies’ use of non-compete agreements and no-poach agreements.  The FTC may also step in to use its broad regulatory authority to define these agreements as deceptive or unfair practices – calling into question the legitimacy of employers using them.  At this point, it is a waiting game, but a waiting game that may end sooner rather than later.  

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