Noncompete agreements continue to disadvantage employees and create massive obstacles for employee mobility. The uncertainty they create is often the biggest problem. What does my noncompete actually preclude me from doing? Can I be fired for not signing it? Is it legal? Is it even enforceable? We hear these questions from clients all the time. And, regardless of the right answers to them, if the employer attempts to enforce the noncompete, the legal process could drag on for months, hardly making it worth the risk for many.
Remedying Noncompete Restrictions
Too often employees just stay put, preferring to avoid the uncertainty, the cost, and the potential legal consequences for violating their noncompetes. Looking into these issues, the Biden administration recently concluded that noncompetes have been a significant contributor to the declining rates of entrepreneurship and economic growth in the country:
Inadequate competition holds back economic growth and innovation. The rate of new business formation has fallen by almost 50% since the 1970s as large businesses make it harder for Americans with good ideas to break into markets. There are fewer opportunities for existing small and independent businesses to access markets and earn a fair return. Economists find that as competition declines, productivity growth slows, business investment and innovation decline, and income, wealth, and racial inequality widen.
To remedy these issues, on July 9, 2021, President Biden issued the Executive Order on Promoting Competition in the American Economy, which in part, asks the Federal Trade Commission (“FTC”) to adopt regulations that limit the use of noncompete agreements in order to increase worker mobility.
Growing Protections Against Unreasonable Noncompetes
The Biden administration’s first steps here follow a national trend among states who have passed legislation restricting the use of noncompetes. While only three states – California, North Dakota, and Oklahoma – completely ban noncompetes, over half now have laws that limit noncompetes in some form. These growing protections are important for a large swath of American workers, as one policy institute estimated that as many as 28% to 47% of all private-sector workers have noncompete agreements with their employers. While seemingly a bit high of an estimate, more often than not, employees simply sign noncompetes put in front of them with all the other onboarding paperwork when hired and don’t think anything about them, until they see how poorly they are treated by their employer or they find a better opportunity elsewhere. By then, it’s often too late for the employee – stuck with an unreasonable noncompete and hesitant to address it.
What the FTC ultimately comes up with in response will be interesting, as the Biden administration appears unlikely (and potentially unable) to wholly prohibit the use of noncompetes. It’s possible that the administration will focus its efforts on noncompetes for low-wage and unskilled workers, to address the nonsense seen in the past few years at sandwich shops and other employers trying to prevent their entry-level workers from being able to get a job elsewhere.
If you need advice on a noncompete agreement – now or after the FTC develops its new regulations – give us a call.