Non-compete agreements, where employees agree that they will not go to work for another competing business or form a competing business that in turn increases the competition for the employer, have been around for a long time. Non-compete agreements typically specify a period of time the employee is barred from working for a competitor or going into business for themselves. They may also specify a geographic area that the non-compete prevents the person from working within. Scope and who is a competitor must also be stated along with what the damages would be if a breach occurs. These limits must be reasonable.
From the businesses’ standpoint the main purpose of non-compete agreements is to protect their proprietary business information (trade secrets) and restrict competition for employees that the employers have developed and provided valuable training to while working for them. Though these reasons make common sense, it seemed to get out of hand a few years ago when some sandwich shop employers put their sandwich makers under non-compete agreements to keep them from jumping to another nearby sandwich shop for an increase in wages or benefits.
For some time now federal government agencies have been looking at non-competes as anti-competitive and state legislatures are now passing bills that prohibit or limit non-compete agreements.
Last January, the Federal Trade Commission (FTC) proposed a rule that if adopted will ban most non-competes throughout the United States. Though the rule was supposed to be finalized after the 60-day comment period earlier this year, the rule has still not been published and it appears the FTC will not vote to issue the rules as final until April of 2024. And, when the rule is published it will be challenged in Court where it is believed the FTC will lose.
Another federal agency challenging non-competes is the National Labor Relations Board (NLRB) which is somewhat unintuitive. Isn’t the NLRB concerned about union organizing? Non-compete agreements are directed more toward individual employees that may leave an employer. Where does the National Labor Relation Act (NLRA) come into play here?
The NLRB’s General Counsel stated her position is that non-competes and non-solicitation agreements interfere with an employees’ rights under the NLRA. How? General Counsel Jennifer Abruzzo states these types of agreements interfere with employees’ right to engage in protected concerted activity. The action that would interfere with NLRA rights is preventing the worker from either bargaining with the employer or moving to another employer in a concerted “protest”.
If the NLRB decides it will also ban non-compete agreements this again would be subject to judicial appeal to the federal courts.
Where traction against non-competition agreements may actually take hold is by passing State laws against them. CCH reports there are currently five states that ban non-competes – California (what a surprise), Colorado, Minnesota, North Dakota, and Oklahoma. It is also reports that up to 20 states may bar different types of non-competes.
In Michigan our legislature is considering a bill that would prohibit employers from requiring employees to enter non-compete agreements unless certain conditions are met (HB 4399). This bill is currently part of a 16-bill “wage theft package” trying to be passed this year by Democrats.
Some of the conditions an employer would have to meet if using a non-compete in Michigan are:
- Provide an applicant with written notice of the non-compete requirement
- Disclose to the applicant in writing what the terms of the non-compete are
- Post the requirements of this law in a conspicuous place accessible to the employees
Further, the employer would not be allowed to request a non-compete from a low wage employee. A low wage employee is defined as a minor or an employee who is paid at a rate less than 138% of the “last published” federal poverty line for a family of three.
This bill along with the rest of the “wage theft” bills are currently being discussed in the Michigan House Labor Committee.
Given the many sides non-compete agreements are being challenged from, CCH recommends evaluating what an employer might do if non-complete agreements become unlawful. Also avoid no-poaching agreements that are also being challenged. Don’t use a non-compete agreement for low wage workers unless there is a very defensible reason for using them. If you use non-competes, use them where they are really needed, not just with any job or position.
Sources:
Investopedia. What is a Non-Compete Agreement? Its Purpose and Requirements; Michigan House Bill No. 4399; CCH Answers Now. The Non-compete Landscape in 2023. What Employers Should Know About Changes in Non-compete Law from the FTC, NLRB, Antitrust Claims and New State Laws. (10/6/2023)
By Michael Burns, courtesy of SBAM-approved partner, ASE.
Click here for more News & Resources.