During a recent webinar, Denny Major discussed the latest updates employers need to know about non-compete agreements and overtime requirements. In this blog post, Denny will highlight key takeaways and considerations for employers related to non-compete agreements.
Over the past several years, there has been growing sentiment against non-compete agreements from the federal government. In 2016, the Obama Administration issued an announcement shortly before the election to get states to curtail the use of non-competes. Then, in 2021, President Biden issued an executive order encouraging agencies to determine ways to diminish the unfair use of non-compete clauses. The desire to eliminate non-compete agreements increased in 2023 with the Federal Trade Commission's (FTC) Proposed Rule, the Workforce Mobility Act of 2023, and the NLRB Memorandum.
FTC Proposed Rule
Early last year, on January 5, 2023, the topic resurfaced when the FTC proposed a rule that would effectively ban employers from entering into non-compete clauses with their workers, including employees and independent contractors. If passed, it would also require employers to rescind existing non-compete covenants and actively inform their workers that the covenants are no longer in effect. It would not ban appropriately tailored non-solicitation or non-disclosure covenants. A final rule is expected to be announced sometime next year.
What is a non-compete agreement?
The FTC Proposed Rule defines non-compete as the following:
"The term non-compete clause includes a contractual term that is, a de facto non-compete clause, because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer."
This prohibits what we traditionally think of as non-compete agreements (which expressly prohibit certain employment), as well as other restrictive covenants (potentially non-solicitation covenants and non-disclosure covenants), but only if they effectively function as a non-compete because they are so broad that they effectively prohibit an employee from working for a competitor.
The FTC Proposed Rule provides several examples, one being a non-disclosure agreement written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker's employment with the employer. In South Carolina, there is already case law essentially saying that a non-disclosure covenant is treated as a non-compete if it prohibits the employee from using general skills and knowledge at another employer. However, non-solicitations and non-disclosures would remain valid if they do not effectively prevent a worker from seeking or accepting employment with a person.
Workforce Mobility Act of 2023
The Workforce Mobility Act of 2023 is a proposed law that a group of bipartisan U.S. Senators introduced on February 1, 2023. Prior versions have been introduced several times, most recently in 2021, but did not make it past a committee vote. It seems to be gaining more traction overall. From a substantive standpoint, it has some similarities and differences with the FTC Proposed Rule. The Workforce Mobility Act prohibits entering into a non-compete agreement, which it defines as:
"Non-compete" agreement refers to any agreement entered into after enactment of the Act between a person and an individual performing work for the person that restricts such individual, after the working relationship between the person and the individual terminates, from performing: 1) any work for another person for a specified period of time; 2) any work in a specified geographical area; or 3) any work for another person that is similar to such individual's work for the person that is a party to such agreement.
It is unclear from the language of the Workforce Mobility Act of 2023 as to whether it would ban covenants not to solicit customers, but there is a good argument that non-solicitation and non-disclosure covenants would not be banned as long as they are narrowly tailored. It is unclear whether this would ever be enacted.
NLRB Memorandum
On May 30, 2023, NLRB General Counsel Jennifer Abruzzo released a memo setting forth her view that the proffer, maintenance, and enforcement of non-compete provisions in employment contracts and severance agreements violate the NLRA except in limited circumstances.
The NLRB Memo explains that overbroad non-compete agreements unlawfully chill employees from exercising their rights under Section 7 of the NLRA, which protects employees' rights to take collective action to improve their working conditions. It is not a binding precedent in this form, and ultimately, the NLRB decisions will govern unless they are challenged in the courts.
It does not implicate supervisors/managerial employees (who have the authority to hire, fire, transfer, suspend, layoff, promote, discipline, etc.). They are not protected under the NLRA.
The NLRB Memo does not affect non-disclosure agreements (unless they are overly broad) and should not affect customer non-solicitations.
What Should SC employers do in light of these federal efforts?
Remember, none of these are binding laws at this time. Even if the new regulations and proposed rules are passed, non-solicitation of customer provisions would appear to be valid under the FTC's Proposed Rule and likely valid under the Workforce Mobility Act and NLRA. Nowadays, non-solicitation covenants are often more effective, at least for sales-type employees. Appropriate non-disclosure agreements would certainly still be valid. Take time now to review any of your company's covenants and agreements and consult with legal counsel to ensure proper protections are in place for your business.
