What to Know About New Restrictions on Non-Competes

Quick Look: Last year President Joe Biden signed an executive order encouraging the Federal Trade Commission (FTC) to ban or limit an employer’s use of non-compete agreements. While the rulemaking process will likely take several months or years to become federal law, employers should continue to review their non-compete agreements for compliance at the state level and look to the HR experts at their PEO company for guidance.

In July 2021 President Joe Biden signed an executive order asking the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The order is meant to restrict these workplace contracts and promote economic growth by making it easier for workers to switch to higher-paying jobs. As of May 2022, the FTC has not issued any rule regarding non-competes, but an update could happen at any time. Employers should review their current non-compete agreements or policies and prepare for potential changes and compliance. Here’s a refresher on what you should know, and some useful tips to consider.

What is a non-compete agreement?

A non-compete agreement, or non-compete clause, is a contract preventing employees from working for competitors in a specific geographic area or industry for a limited amount of time after their employment is over. Employers generally use non-competes to protect their proprietary information and minimize the risk of future litigation.

Research from the Economic Policy Institute shows that up to 60 million workers in the U.S. are covered by non-competes. The report found that businesses with well-paid, highly educated workers are more likely to use non-compete agreements. However, they are not uncommon in industries dominated by low-wage workers. In fact, almost 30% of businesses offering an average hourly wage below $13 required non-competes for their employees.

State legislature for non-competes

The regulation of non-competes has historically been left to the state level, many of which have been busy changing legislations of their own—and those laws vary significantly.

For example, California, North Dakota, and Oklahoma have banned non-competes in most circumstances, while Massachusetts only bans non-competes for certain professions, like nurses, physicians, and social workers. A handful of other states have passed laws restricting the use of non-compete agreements under certain stipulations, or for lower-wage earners, such as:

Colorado: Recently became the first state to criminalize the use of void non-compete agreements and makes it a “Class A misdemeanor” for employers to implement void restrictive covenants. This law prohibits non-compete agreements that restricts a person’s right to receive compensation, unless such agreement falls into one of four categories.

Illinois: Prohibits employers from entering into non-compete agreements with employees who earn $75,000 per year or less and prohibits employers from entering into non-solicitation agreements with employees who earn $45,000 per year or less.

Nevada: Effective October 1, 2021, a non-compete agreement may no longer apply to an employee who is paid solely on an hourly wage basis, exclusive of tips or gratuities.

Oregon: Employers are required to limit the restrictions in non-competes to 12 months after termination. The law also prohibits employers from enforcing non-competes against employees who are classified as non-exempt, and/or earn $100,533 or less per year, unless the employer has agreed in writing to pay the employee during the post-termination restricted period.

Washington, D.C.: Will hold one of the strictest rules in the country and places a near total ban on the use of non-compete agreements. The law, set to go into effect in October 2022, will also require an employer to inform employees of the new law under threat of administrative and monetary fines. The act contains limited exceptions, like non-compete agreements in the context of the sale of a business.

Prepare to comply

It’s important for small- and medium-sized businesses (SMBs) to review their current agreements and practices to determine which non-compete laws apply to their locations. Employers should consult their legal counsel or the compliance experts at their professional employer organization (PEO) for help.

The professionals at a PEO can:

• Offer guidance on how to craft a non-compete agreement—when and where applicable
• Ensure compliant company policies whether a position is salaried, exempt, or hourly non-exempt
• Provide expertise for hiring, pay equity, time and labor, and more
• Offer alternatives to non-competes, like confidentiality agreements
• Protect your business from liability or exposure to costly penalties
• Revise company policies, update related employment documentation, assist with questions or concerns, and make recommendations for how to handle issues related to non-compete and other employment agreements

Useful tips for employers

Are your non-compete agreements sufficient? Compliant? Fair? If you’re unsure, use these tips to help you avoid any pitfalls, while also not restricting employee mobility.

Carefully review and craft agreements: Regularly review your non-compete agreements with your legal counsel to ensure they are compliant, meet necessary requirements, and do not contain any unreasonable restrictions. Then, review the non-compete agreements of current positions and determine whether to make any changes. Additionally, employers should work to ensure their non-competes are equitable across all demographic categories, including gender and race.

Check if a non-compete is enforceable in your state: Remember, different states have different rules when it comes to non-compete agreements. Reasonable non-competes are perfectly legal in most cases, but some states (like California) have all but banned these agreements. Leverage your PEO partner or HR outsourcing professional for guidance on staying up to date with the rapidly changing laws and regulations in your state.

Determine who needs to sign a non-compete: Not all employees need to sign a non-compete agreement, so consider writing specific agreements for certain key employees instead. For example, employees who do not deal directly with trade secrets, clients, or financials likely do not need to sign a non-compete. The same may not apply for a C-Level executive or high-performing sales representative.

Establish what you need to protect: Decide which restrictions need to be in place to protect your business interests. It may not be enough to simply say that your former employees can’t work for your competitors, you should clearly define what work and activities they cannot perform. Use industry, business, and employee-specific parameters. But remember, excessive restrictions likely will not be enforceable.

Define geographic limitations and reasonable time: Most non-compete agreements operate within geographic and time constraints. If you’re a regional organization, your non-compete likely cannot extend to the entire country. It can, however, certainly include the area in which you conduct business. Work with your PEO partner or HR outsourcing professional to determine an appropriate distance. Time limitations can be a bit trickier, but best practice is usually no more than two years.

Conduct exit interviews: Remind employees during their exit interview that they do in fact have a non-compete agreement in place and may need to review the contract to avoid future legal implications.

Non-competes can be complicated, but you don’t have to face them alone

The appropriate use of non-competes can be an effective way to protect your business. While much remains to be done before any ban or limits take place at the federal level, employers should proactively evaluate how a potential change in law could impact their current contracts. Experienced professionals at a PEO can assist in creating compliant non-compete agreements that strike a healthy balance between protecting your business interests and protecting former employees.

Need help ensuring your policies are compliant and up to date? Our compliance experts are here to answer your questions.