President Biden signed an Executive Order broadly targeting anti-competitive tactics that disadvantage smaller businesses and people.
One aspect of this order targets the use of noncompete agreements. Under the Order, the Federal Trade Commission (FTC) is encouraged to ban or limit noncompete agreements.
The noncompete provision of the Order is intended to promote competition and economic growth by making it easier for workers to change jobs. The Order also encourages the FTC to limit employers’ ability to share wage and benefits data to prevent employers from collaborating to suppress wages and benefits.
Why it matters:
According to the Order:
Roughly half of all private-sector businesses require at least some employees to enter non-compete agreements, affecting 36 to 60 million workers [and] third parties … make wage data available to employers—and not to workers—in certain circumstances without triggering antitrust scrutiny. This may be used to collaborate to suppress wages and benefits.
Yet many businesses are using post-employment restrictions simply to limit wages. For example, we recently obtained a ruling from Michigan’s Wage and Hour Division against an IT subcontractor over its use of a noncompete and other post-employment restrictions.
The subcontractor claimed our client improperly disclosed “confidential information,” which consisted of the employee’s own compensation rate and terms. The subcontractor further claimed the employee breached the agreement and engaged in unfair competition by obtaining a higher-paying job with a competitor. But such restrictions are not permitted under Michigan law, which provides that employers may not, as a condition of employment, prohibit employees from discussing their wages or benefits.
How the Order will Affect Noncompete Agreements:
It’s not clear how the Executive Order will affect noncompete restrictions used by businesses.
One reason for this uncertainty is that noncompete agreements are mainly subject to state laws. And states vary significantly in how noncompete agreements are treated.
For example, California generally bans their use in employment situations. Other states have limitations based on wages. States like Michigan allow for their use if specific requirements are met involving “reasonableness.” And other states have no specific laws for or against noncompete restrictions.
Second, aside from the Order focusing on “unfair” use of noncompetes restrictions, it is unclear how broad the ban would be.
We think it is unlikely that the FTC will move to eliminate post-employment restrictions. But because the Order focuses on protecting mobility and the ability of lower-wage workers to get higher-paying jobs, we believe the FTC will likely concentrate on limiting noncompete restrictions imposed on low-wage workers.
Yet even with the uncertainty over how President Biden’s Order will apply, employers should review their noncompete agreements.
How Should Employers Respond:
President Biden’s Order follows a trend towards scrutinizing the use of noncompete restrictions in general, but especially in lower-wage jobs. Such scrutiny has come from egregious misuse of noncompete restrictions like Jimmy John’s imposing them on sandwich makers (See Jimmy John’s Sued (Again) Over its Noncompete Restrictions) or actions by state legislatures or attorney generals limiting their use or suing under anti-competition theories.
We will be counseling businesses on how noncompete restrictions are currently used. One focus area will be whether our clients impose noncompete restrictions across the board for all employees or (preferably) in a more surgical manner consistent with reasonably protecting the business from unfair competition.
If you would like more information about best practices and legal strategies for maximizing post-employment protections or understand if your noncompete agreement is enforceable, use this link to contact Michigan attorney Jason Shinn. Since 2001, Mr. Shinn has represented companies and individuals concerning the issues discussed above and other employment matters under federal and Michigan employment laws.