US: Recent Legal Developments Surrounding Non-Compete Agreements

Genna Wolinsky, Legal Analyst

Genna is a US Legal Analyst who came to McO with a background in plaintiff’s-side litigation and class-action lawsuits. At McO, she focuses on employment, higher education, and sexual abuse cases. She plans to qualify as a US lawyer in the future.

The national conversation around the use and fairness of non-compete agreements has surged in recent years. What was formerly a device used primarily for retaining C-suite executives and protecting corporate interests is now commonly found in employment contracts for lower-paying and blue-collar roles. In fact, non-compete clauses now impact approximately one in five American workers.  Policy on non-compete agreements has changed rapidly, and this article clarifies the current legal landscape surrounding these provisions.

What Is a Non-Compete Agreement?

A non-compete agreement is a contract between an employer and an employee that restricts the employee from working for the employer’s competitors for a certain period of time after their employment relationship ends. It may also limit the employee’s options for starting their own competing company in that industry.

These agreements vary in scope. Some may list specific companies that are off limits, while others may bar employment within the same industry entirely for the non-compete period. Regardless of their breadth, they all seek to retain employees and protect corporate assets.

From an employer’s perspective, a primary benefit of non-compete agreements is protecting confidential information by prohibiting employees with access to trade secrets or other proprietary information from leaving to work for a competitor. By restricting their staff’s future employment options, non-compete agreements may also incentivize employers to further invest in training and development.

However, these agreements can also limit worker mobility by restricting future employment prospects, which can discourage workers from leaving employers they are unhappy with. It can also reduce the incentive for employers to raise salaries or improve benefits for their workers, knowing their employees have fewer alternatives. Lastly, some argue that these agreements stifle innovation and entrepreneurship by restricting employees from leaving to start their own companies, asserting that the number of start-ups around the country would soar if employees were not bound by these restrictive covenants.

Recent Legal Action

While non-competes have historically been governed by state law, the Biden administration sought to limit their use and enforcement on a national basis. On January 5, 2023, the Federal Trade Commission (FTC) released a notice of proposed rulemaking that would have banned the inclusion and enforcement of most non-compete agreements. The FTC sought public comments on the proposed rule and subsequently issued a final rule on April 23, 2024. If enacted, this rule would have banned most new non-compete agreements and made existing ones unenforceable.

This rule was set to go into effect on September 4, 2024. It faced immediate legal challenges. Court opinions from Texas and Florida held that the FTC had exceeded its authority in creating this rule. Though the FTC initially planned to appeal these legal decisions, under the Trump administration it has taken steps to dismiss those appeals and is no longer seeking nationwide enforcement of the rule.

However, the FTC has since announced a number of other initiatives related to non-compete agreements. It has put out a Request for Information (RFI) to gather more information about their prevalence and effects on workers, and the FTC will continue to pursue companies that use non-compete agreements in a deceptive, unfair, or anticompetitive manner.

Therefore, while there is currently no federal regulation banning non-compete agreements in employment contracts, individual states still have the power to pass legislation making such agreements unlawful. Many already have – see the State Noncompete Law Tracker from the Economic Innovation Group for more information about how your state regulates these agreements.

Alternatives to Non-Competes

Regardless of the outcome of these legal battles surrounding non-compete agreements, there are also a number of alternatives to these provisions. Companies seeking to protect their confidential information or existing customer relationships can include non-solicitation or confidentiality agreements in their employment contracts. These provisions protect proprietary information and a company’s customer base without limiting worker mobility.

To address concerns that employees will leave soon after receiving costly training, some companies have included Training Repayment Agreement Provisions (TRAP) in their employment contracts. Under these, if an employee leaves before the end of the TRAP’s specified period, they will be required to repay some of the training or education costs. This mechanism helps protect company investments without restricting the future employment prospects of employees.

Nearly 30 million Americans are currently impacted by non-compete agreements. Although these provisions vary in scope and severity, it is crucial to know how they could affect you, either as an employer or an employee, and what your rights are.