Should I Stay or Should I Go: Will 2023 be the Death Knell for Non-Compete Agreements?

UPDATE (June 27, 2023): Since the original post, the New York State bill passed the NYS Assembly and is currently awaiting Governor Hochul’s signature.

It is hard to be a non-compete agreement (“NCA”) in 2023.  It seems like every week another regulatory body or state legislature comes out against this long-standing tool in the employer-employee relationship.  Just in the past few months, the Federal Trade Commission (“FTC”), the National Labor Relations Bureau (“NLRB”) and New York State have all come out against non-compete agreements in one way or another.

  • In January 2023, the FTC announced a proposed rule that would essentially ban all non-compete agreements with retroactive effect.  The last day to comment on the proposal was April 19, 2023.  Although non-solicit agreements are not specifically covered, under the proposed definition of “non-compete clause,” non-solicits would be considered non-compete clauses “where they are so unusually broad in scope that they function as such.”
  • The New York State legislature is considering amendments to New York Labor Law to similarly ban non-competes, though without retroactive effect.  There appears to be language in this proposed legislation that carves out non-solicitation agreements from the ban.
  • And to top it off, just at the end of May 2023, NLRB’s General Counsel came out with a memo opining that non-compete agreements may  violate Section 7 of the NLRA.  This memo also expresses a negative view of non-solicitation agreements as violative of employees’ rights regarding concerted activity.

The headwinds against NCAs in other jurisdictions have already been blowing strong for some time. By way of example: 

  • Indiana banned non-competes for certain medical professionals effective July 1, 2023;
  • Washington, D.C. banned non-competes for most employees who make less than $150,000.00 or physicians who make less than $250,000.00;
  • California has generally banned non-competes outright;
  • A number of states, including Colorado and Illinois, prohibit NCAs for employees below a certain salary threshold.
  • In Connecticut, proposed legislation would restrict the use of NCAs unless they meet certain strict requirements, be no longer than one year in duration and apply to exempt employees only.  

What’s An Employer to Do?

  • As things stand now, many jurisdictions (including NY) still enforce non-competes so long as they are reasonable in geographic scope, length, and narrowly drafted to protect a protectable interest of the employer.  Employers who have not had legal counsel review existing NCAs recently should review their language to ensure that the prohibitions are likely to be enforced by a Court if challenged.
  • Although it is still unclear which way the questions regarding non-solicitation agreements will play out, the current legislative and regulatory efforts seem to recognize that non-solicits are different from non-competes and can be a legitimate tool when narrowly tailored. Thus, employers should also review their non-solicitation agreement practices and tailor them accordingly to replace, if possible, the use of non-compete prohibitions. 
  • Non-disclosure agreements (“NDAs”) are still permitted as a tool to limit disclosure of proprietary business or trade secret information. However, NDAs cannot be so overbroad as to prohibit the disclosure of information that would prevent the employee from participating in an EEOC or other government regulatory investigation, chill potential Section 7 activities, or limit the ability of most employees to share compensation information with others. Additionally, there are limits to their use in certain circumstances, typically involving settling or resolving claims of sexual harassment and assault.  Similarly, NDAs should not be so broad as to make NDAs virtually indistinguishable from non-competes, functionally.  Employers should ensure that existing NDAs do no more than necessary to protect legitimate proprietary information from disclosure by departing employees.
  • Employers may also want to consider alternatives to NCAs, such as offering paid “garden leave” during a would-be period of restriction, or a “forfeiture for competition” arrangement.

As always, all of these options should not be considered in a vacuum, but reviewed and considered in consultation with your business stakeholders and legal counsel.

Woltz & Folkinshteyn, P.C. welcomes your questions about this and any other employment concerns that you may have.

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