The Feds Are Going After Non-Compete Covenants

Jaburg Wilk
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Jaburg Wilk

On July 7, 2021, President Biden announced that he intends to sign an executive order targeting employer-employee non-compete covenants (agreements) nationwide through the Federal Trade Commission (FTC). The FTC investigates and enforces a variety of antitrust and consumer protection laws governing unfair or deceptive acts or practices it deems to be unfair or deceptive. Those laws extend to the acts or practices of employers in the economic market that affect their employees.

An employer-employee non-compete covenant is an agreement between an employer and an employee that attempts to prevent the employee from going to work for a competitor or otherwise competing against the employer after the employment ends. By definition, it restrains the competition among employers for hiring and keeping valuable employees and among employees for moving from job to job in search of the best and highest paying job they can find. Such covenants are generally disfavored by courts and held to a strict standard of being reasonable in scope and effect. What is reasonable, however, depends on whether you are an employer or an employee.

This country is a patchwork of state laws that govern whether and to what extent an employer-employee non-compete covenant is reasonable, and thus valid and enforceable. Different states have different views. In California, the state legislature has determined by statute that such covenants are never reasonable and cannot be enforced. New York has enacted a similar law. Other states have enacted laws that make it easier to enforce them. In Arizona, which is where I practice, the courts decide on a case-by-case basis whether to enforce them. Whether you are an employer or an employee, the rules change from state to state.

But now the feds are getting involved, and President Biden's executive order, if signed, may nationalize the point of view that employer-employee non-compete covenants are a bad idea for employees and the economy. Because federal laws often preempt state laws that address the same issues, the order may outlaw such covenants in all states, making the FTC the enforcement agency in charge of policing compliance. It may also call for placing limits on an employer's ability to share its employee pay information with other employers, a kind of "price-fixing" that could suppress wages that employers are willing to pay for hiring and keeping valuable employees.

There is no reason to panic, however, because whatever happens will take some time to happen. The FTC will have to engage in a lengthy "rule making" process, writing the new rules and regulations, calling for public comment, and the like, before anything can happen.

I will continue to monitor this new development in employment and labor law and keep you posted.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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