President Obama: Most Workers Should Not Sign Non-Compete Agreements

Yesterday, the White House issued a State Call to Action on Non-Compete Agreements. This follows the President’s April 15, 2016 Executive Order that addressed steps to protect workers and increase competition.  The President’s position is clear: “Most workers should not be covered by a non-compete agreement.” Instead, non-competes should be “the exception rather than the rule.” Meanwhile, “there is gross overuse of non-compete clauses today.”

This Call to Action encourages states to implement certain policy objectives regarding non-competes, including:

  1. Banning non-competes for workers (a) under a certain wage threshold, (b) in occupations that promote public health and safety, (c) unlikely to possess trade secrets, or (d) laid off or terminated without cause.
  2. Increasing the transparency and fairness of non-competes such as by requiring disclosure of the agreement prior to acceptance of a job or promotion and mandating consideration in addition to continued employment.
  3. Encouraging employers to write enforceable contracts, such as by promoting the “red pencil doctrine,” under which non-compete agreements with unenforceable provisions are void in their entirety.

President Obama is right: non-compete agreements are overused. For example, as noted in this article discussing the Call to Action, 20% of U.S. workers are bound by non-competes, including 14% of workers earning less than $40,000 per year. While there may be exceptions, most of these lower-income workers should never have been required to sign a non-compete.

At the same time, companies need to be able to protect their trade secrets and proprietary information. Thus, non-compete agreements are absolutely appropriate in many circumstances. This requires a case-by-case analysis. The more senior the employee, and the more access the employee has to proprietary information, the more likely a non-compete is appropriate. When making this determination, companies need to resist using a one-size-fits-all approach to restrictive covenants. Often, less onerous measures like non-solicitation and non-disclosure agreements will be sufficient to protect the company. Particularly for lower-level employees.

There is room for common-sense legislation to protect vulnerable workers from non-compete agreements. Too many companies force non-competes on lower-level workers, without regard for whether the company needs that level of protection. But I would not go as far as the Call to Action suggests. Instead, I favor implementing a rebuttable presumption that an employer does not have a legitimate business interest justifying a non-compete agreement when the employee makes under a certain amount per year, say $40,000. I would not apply this presumption to non-solicitation or non-disclosure agreements.

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