By Joseph S. Brown
On July 9, 2021, President Biden signed an Executive Order on “Promoting Competition in the American Economy”. The White House also issued a Fact Sheet announcing that the Order would, “[m]ake it easier to change jobs and help raise wages by banning or limiting non-compete agreements and unnecessary, cumbersome occupational licensing requirements that impede economic mobility.”
So, what does the Order mean for New York employers with non-compete agreements? As explained below, the Order does not prohibit non-competition agreements and is not likely to have any immediate impact. But New York employers should anticipate that federal and state regulators will be increasingly hostile toward non-compete agreements in the years to come.
1. What Does the Order Say About Non-Compete Agreements?
According to the White House, about half of private-sector businesses require at least some employees to enter non-compete agreements, affecting some 36 to 60 million workers. Specifically, the Order encourages the Federal Trade Commission (FTC) to create rules “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Otherwise stated, the Order encourages the FTC to initiate the rule-making process to limit the unfair use of non-competition covenants and other restrictive covenants, which may include non-solicitation, non-poaching and/or non-servicing restrictions. The Order does not ban non-competes.
At this time, we do know whether the FTC will propose very broad limitations that could potentially ban all employee noncompete agreements, or whether the FTC will target specific industries or categories of employees, such as lower-income employees. Moreover, any rules promulgated by the FTC will likely be subject to legal challenges on several grounds including attacks on the FTC’s statutory authority and a broad array of constitutional law arguments.
2. What Impact will the Order Have in New York State?
None. Employers may continue to utilize non-competition and related agreements, consistent with applicable New York law, which are reasonable in geographic and temporal scope and necessary to protect their legitimate business interests (e.g., the use, disclosure and/or loss of confidential and trade secret information, customer relationships and goodwill). Non-competes in New York are generally enforceable against high level employees.
But employers in New York should also be aware that legislators and state attorney generals across the nation, including New York’s, have been engaged in efforts to curtail the use of non-compete agreements. Three states — California, North Dakota and Oklahoma — already ban noncompete agreements, and close to a dozen states prohibit their use with low wage workers. Washington D.C. recently passed sweeping legislation banning non-competes, which took effect on March 26, 2021.
In 2017, the New York Attorney General’s Office proposed BILL A07864A in the New York State Assembly which would substantially limit the enforceability of non-compete provisions. As proposed, non-compete agreements would be categorically prohibited for any employee earning less than $75,000 per year. This bill and similar legislative proposals have stalled in recent years, but this could change due to the increased attention that non-competes are getting from the federal government and attorney generals across the country.
Nineteen state attorneys general — including New York’s — wrote to the FTC in March of 2021 to urge the agency to take a comprehensive approach to stemming the anticompetitive effects of employee noncompetes, one that included new rules, education and enforcement. And New York’s Attorney General has also been proactive in pursuing cases to curtail the use of noncompetes against low-wage workers, securing settlements with WeWork and Jimmy John's.
3. What Can Employers Do to Cost-Effectively Protect Their Legitimate Business Interests?
As noted above, employers may continue to utilize non-competition and related agreements, consistent with applicable New York law. While President Biden’s Order does not impact New York law, the potential of future action at the federal level limiting the use of non-compete agreements and increased scrutiny by state legislators and prosecutors suggests that employers should proceed cautiously:
a. Be selective: Carefully tailor an agreement’s reach to specific business concerns or classifications of employees with a non-solicitation and/or non-disclosure agreement rather an implementing a “one size fits all” broad non-compete signed by all employees.
b. Periodic Review by Employment Counsel: Have employment law counsel periodically review existing agreements to ensure they are consistent with changes in the law and best practices. The laws are rapidly changing. Hurwitz & Fine, P.C. continues to monitor and analyze state and federal updates to employment laws.
Please contact any member of the firm’s Labor & Employment team for guidance on these evolving issues at 716-849-8900 or by e-mail.