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:
- 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.
- 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.
- 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.