In early July, President Biden signed the Executive Order on Promoting Competition in the American Economy. The order directs federal agencies to conduct a sweeping array of activities designed to monitor and regulate business practices that the Biden administration asserts have potential adverse effects on open competition.

Most everyone supports the idea of open markets, right? Competition is simply the American way of doing business. At the same time, some businesses have gained enough power to adopt practices and policies that give them substantial advantages.

One such practice is the use of non-compete terms in employment agreements between businesses and their employees. These contracts spell out the rights and responsibilities of both parties, although since the employer is the one writing the contract, it’s no surprise that the terms tend to protect the interests of the employer more so than those of the employee.

In his order, President Biden says, “Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs.”  He then directs the Federal Trade Commission to “address agreements that may unduly limit workers’ ability to change jobs.” 

Contracts offering to serve another have been around for centuries. A tenet of American contract law is the foundation here: Persons are generally free to contract however they choose.

By agreeing to a non-compete clause, an employee promises to not work for a competitor of the employer for a period of time after leaving employment. The trade-off for this promise is the right to work for and get paid by the employer. The company gains peace of mind in knowing a worker is not going to take business to a competitor after leaving the job.

At one time, employment agreements were mostly used for professional-type positions. Sales reps were limited from selling for a direct competitor. Doctors and lawyers agreed to not accept work at competing practices. Executives promised to forego similar positions at competing companies.

But in recent years, more employers have adopted the practice for a much wider range of employees. Service industries, such as retailers, hotels, restaurants, and hair salons have adopted the practice of requiring workers to agree not to work for competitors after leaving a job. Today, it’s common to find  non-compete agreements used for jobs as security guards, pre-school teachers, customer service representatives, and home health aides. A few employers even require them for part-time positions. 

The government estimates that 16-18% percent of American workers have a non-compete agreement at their current jobs. Of those, an estimated 40-60% were asked to sign the contract on their first day of work. These numbers support an argument that the agreements aren’t so voluntary on the part of the employee. The employer’s position is: Either sign, or don’t work here.

Courts have generally enforced non-compete clauses as long as the terms are reasonable in duration and geography given the type of job. A rule of thumb for many job positions is a 6-month to two-year term for non-competing within a reasonable radius of the prior employer.

As more companies have required non-compete agreements from lower-wage and less-strategic workers, the courts have become more discerning. A sandwich shop worker in Illinois challenged enforcement of her agreement that required her to forego subsequent employment at any food service business with 10% or more of its revenue in sandwiches, located within a three-mile radius of any of the employer’s franchise locations in the country. With help from the Illinois Attorney General’s office, she was successful in convincing the court that such terms were unreasonable in light of her position as an assistant store manager.

Some states have already stepped in to regulate this practice. California, North Dakota, and Oklahoma do not allow employers to use non-compete agreements. Oregon bans them for low-wage workers. But federal law has been fairly silent on use of non-compete contracts – until now. President Biden’s order specifically calls on the Federal Trade Commission to use its rule-making authority to develop regulations to “curtail the use of non-compete provisions to limit, dissuade or curtail worker mobility.”

For now, it’s business as usual while employers wait to see what actions the FTC will take. Rulemaking by federal agencies is a lengthy process. Nonetheless, an eventual outcome may well be that non-compete contracts signed today will be negated and unenforceable in the future. 

Before leaving this topic, one important distinction should be made. An employer has the right to protect its trade secrets. Under the common law, employees have a legal duty to not disclose or use trade secrets, even after leaving their employment. Unauthorized sharing of trade secrets can give rise to a claim for damages by the prior employer.

To protect trade secrets, an employer is expected to identify the information it considers to be trade secrets, to notify the employee that it is proprietary, and to maintain its secrecy. Any effort by the government to allow greater mobility of workers between employers is not likely to do away with the restriction on using or sharing the trade secrets of the former employer. As workers move to new jobs, they should be mindful to not share such information with a new employer. 

Judith Wright, Assistant Clinical Professor of Business Law at the Indiana University Kelley School of Business at IUPUI

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