In a move the Biden administration says is designed to promote job mobility and a healthy, competitive economy, President Biden recently signed an executive order restricting the use of noncompete agreements in hiring. And now, HR leaders have to gear up to make some potentially big changes to their employee contracts.
The July 9 order instructs the Federal Trade Commission to adopt rules that either limit or ban the use of noncompete agreements when hiring workers. The order doesn’t outright prohibit employers from relying on such agreements but rather asks the FTC to create a federal regulation that would “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” When the FTC follows suit, it would be the first federal move to restrict noncompete agreements, as governance over such contracts has traditionally been left to states.
In a statement, Jen Psaki, White House press secretary, noted that roughly half of private sector businesses require at least some employees to enter noncompete agreements, affecting over 30 million people.
Over the years, however, experts say, some companies have taken their noncompete clauses to the extreme. Take Jimmy John’s, an Illinois-based sandwich chain. Its noncompete clause—dropped in 2016 after legal challenges—not only barred employees from taking jobs with competitors for two years, but also prevented them from working for rival stores that earned more than 10% of their revenue from sandwiches and were also within two miles of a Jimmy John’s store.
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“There are examples where employers are enforcing noncompete agreements against low-wage earners who don’t have trade secrets or confidential information,” says Leonard Samuels, partner at Berger Singerman law firm. “They went a little beyond the initial reason for allowing noncompetes in the first place.”
Until the FTC publishes its rules, Samuels says, it wouldn’t hurt for HR professionals to review what type of employees are now required to sign noncompete agreements as a condition of employment. Then ask these questions: Are noncompete agreements necessary among low-wage earners who typically don’t have access to proprietary information? Would your company be truly harmed if an employee in this position left to go work for a competitor? Are noncompete agreements only being used to protect legitimate business interests?
Likewise, ensure that the company’s senior staff is aware of potential, upcoming FTC changes and also that your company’s agreements observe state laws. So far, there are 60 noncompete bills pending in 21 states—New York alone has three separate bills on the table—and also two pending federal noncompete bills, according to Fair Competition Law, a litigation boutique.
Samuels says that he would be “very surprised” if the FTC limited an employer’s ability to use noncompete agreements with employees who are privy or exposed to sensitive company information. He suspects that changes may apply to low-wage earners like hotel or blue-collar workers, such as construction workers, enabling them to accept better job offers.
Meanwhile, Samuels says, all HR professionals can do is simply adopt a wait-and-see attitude.
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