By: Roshelle Firdman
About 30% of private sector employers currently use noncompete agreements for all their workers, citing a need to protect trade secrets and other sensitive information from rival firms.[1] The Federal Trade Commission (the “FTC”), on January 5, 2023, released a proposal suggesting the prohibition of noncompete agreements on the basis that they constitute unfair methods of competition.[2] Specifically, the FTC believes that noncompete agreements violate Section 5 of the Federal Trade Commission Act.[3] In support of this notion, the FTC concluded that “noncompetes suppress wages, stifle innovation and make it harder for entrepreneurs to start new businesses.”[4] This proposed prohibition is still awaiting a final rule federally, but the four states of California, Minnesota, North Dakota, and Oklahoma have already proceeded with the banning of noncompete agreements entirely.[5] Other states have enacted restrictions such as setting a compensation threshold or requiring advance notice, [6] while Maryland and Oregon have prohibited noncompete use among lower-paid employees to start. [7] New York legislature passed a bill—Senate Bill S3100A—which would not only update New York labor law and prohibit noncompete agreements and certain restrictive covenants but would also authorize “covered individuals to bring a civil action in a court of competent jurisdiction against any employer or persons alleged to have violated such prohibition.”[8] Even so, this bill is not yet effective as it is still awaiting approval and signature by Governor Kathy Hochul.
The FTC estimates the positive future implications to a ban on noncompete agreements could result in an increase to wages by nearly $300 billion a year while simultaneously broadening job opportunities for approximately 40 million Americans (allowing workers to be free from the restrictions those agreements historically place on them). [9] However, big businesses, in favor of the noncompete, will not necessarily let this ban go without a fight. Upon releasing their proposal, the FTC received a series of letters from the U.S. Chamber of Commerce and a leading human resources group in response which essentially asked the agency to stand down or shrink/re-work its proposal, primarily questioning their legal authority of taking such action.[10]
But the FTC is not the only agency concerned with the dangers, negative repercussions, and legal challenges of noncompetes. Back in February of 2023, the National Labor Relations Board (NLRB) decided in McLaren Macomb that an employer is deemed as committing an ‘unfair labor practice’ if they attempt to provide employees with a severance agreement that requires them to waive their rights and forces broad confidentiality upon them.[11] After this, General Counsel Jennifer Abruzzo (“GC”) for the NLRB issued a memorandum[12] which announced that some noncompete agreements violate the National Labor Relations Act (NLRA).[13] This Memorandum provides Regional Directors and other staff of the NLRB with how they can and should navigate the field – now that the McClaren Macomb rule has taken effect. Some of the GC’s interpretations of the McClaren decision include that employers can continue to present employees with lawful and compliant severance agreements as long as “they do not have overly broad provisions that affect the rights of employees to engage with one another to improve their lot as employees.”[14] Not only that, McClaren McComb was designed to be applied retroactively, so that employers may be subject to charges of unfair labor practice attached to their existing agreements.[15] Notably, McClaren Macomb only impacts confidentiality and disparagement provisions for nonsupervisory employees; and thus, they are still applicable to supervisors according to this decision.[16]
While we await the outcome of the federal ban, noncompetes may yet have a future. It is plausible to expect that we are amidst a transformation of the agreement as we lean further towards increased employment rights.
[1] J.J. McCorvey & Sara Ruberg, Big business rally to preserve their right to limit ex-workers’ job options, NBC (April 20, 2023, 1:44 PM) https://www.nbcnews.com/business/business-news/ftc-ban-noncompete-agreements-employers-lobbying-rcna77169.
[2] Sarah R. Goodman, Noncompete Update: Bans, New Limitations, and Restrictions 268 The Legal Intelligencer 7 (2023).
[3] Leah Shepherd, States Outlaw Noncompete Agreements, SHRM (July 10, 2023)
[4] See id.
[5] See id.
[6] See id.
[7] Andrea Hsu, Millions of workers are subject to noncompete agreements, they could soon be banned, NPR (January 5, 2023, 3:13 PM) https://www.npr.org/2023/01/05/1147138052/workers-noncompete-agreements-ftc-lina-khan-ban.
[8] Senate Bill S3100A (2023).
[9] Hsu, supra note 7.
[10] Ruberg, supra note 1.
[11]McLaren Macomb, 372 N.L.R.B. No. 58 (2023).
[12] See Memorandum GC 23-05.
[13] Allen Smith, NLRB General Counsel: Noncompete Agreements Usually are Unlawful, SHRM (May 31, 2023) https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/nlrb-noncompetes-often-violate-nlra.aspx.
[14] See Memorandum GC 23-05.
[15] See id.
[16] See id.
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