Noncompete Agreements for the Modern Age

Banning noncompete agreements. It’s all the rage, and it could be coming to a state legislature near you – if it hasn’t already.

In September, California Governor Gavin Newsom signed into law a bill prohibiting employers from entering noncompete agreements or enforcing them. Now Democratic Governor Kathy Hochul must decide if New York will join the Golden State and others in implementing such a ban.

Noncompete agreements stipulate that former employees can’t take a new job with a competitor or start a competing business for a specified period after separating from an employer. The general objective is to keep a company’s proprietary information in-house. Typically, noncompete agreements have applied to executives and other employees with specific skills or knowledge of a company’s operations. However, some employers have started using them for a wide swath of employees up and down the org chart.

A study from the U.S. Government Accountability Office released earlier this year found that about 20% of workers across the country currently face noncompete agreements. Almost double that amount had been subject to such an arrangement at some point in their careers. Roughly half of private sector companies surveyed by GAO said they required at least some of their employers to accept noncompete agreements.

So, what’s wrong with noncompete agreements? Plenty, according to GAO. Obviously, they restrict job mobility. GAO also found they may depress wages and discourage the creation of new businesses.

In proposing earlier this year to ban noncompete agreements, the Federal Trade Commission called them an “often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” The agency projected that doing away with them would grow wages by almost $300 billion per year.

“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition,” said Lina M. Khan, chair of the FTC.

The FTC served up its proposed rule banning noncompetes in January, but some states apparently felt the need to get a jump on the federal rulemaking process. All signs point to New York joining their ranks soon enough. The big question facing Hochul: Would such a ban merit a compensation cap? For instance, the Business Council of New York State is lobbying to allow companies to retain noncompete agreements for employees earning at least $200,000.

In the meantime, employers and states are grappling with noncompete agreements in the context of rapid changes to work environments. The Covid-19 pandemic sped the migration of employees from offices to their homes. Some work-from-home positions get filled by people who live far away from the state where their employers do business. As a result, employers are seeking input from law firms regarding how noncompetes apply to remote work – if at all.

Sounds messy. But until a federal rule is put in place, employers will have to sort noncompete laws on a state-by-state basis.

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The Intelligize blog is on hiatus for the winter holidays and will return on Thursday, January 4, 2024

 

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