On July 9, 2021, President Biden signed Executive Order 14036, entitled Promoting Competition in the American Economy. Among its 72 initiatives is one that I get asked about a lot – the encouraged ban or limitation on non-compete agreements.
If your company has or is thinking about creating Employment Agreements with some sort of non-competition or non-solicitation provision, and you’ve heard about this Order, chances are you’ve wondered what it means for you. The answer is “right now, nothing, but here’s what you should know and do to prepare.”
Non-competition provisions are non-solicitation provisions fall under the category known as Restrictive Covenants, because they establish a promise on the part of the employee to restrict his or her future actions. Non-competition provisions preclude employees from setting up a competing business within a specific geographic area. Non-solicitation provisions preclude employees from soliciting customers or employees of their now-presumably former employer to work elsewhere.
Pardon me while I paint using very broad brushstrokes:
From the perspective of the employer, Restrictive Covenants are eminently fair. No employer wants to invest time and money building up an employee’s knowledge, influence, customer relationships, and visibility only to have a competitor benefit from that investment.
From the perspective of the employee, Restrictive Covenants are decidedly unfair. No employee wants to have to decide between staying in an unhappy position or being forced to uproot his or her family to continue working in his or her chosen industry.
There are reasonable people on each side of this debate, as well as nuances.
What you need to know as an employer about restrictive covenants:
When business owners ask me about employment agreements, and sometimes even Employee Handbooks, what they’re really often asking me about are so-called non-compete agreements.
- “Are they enforceable?”
- “Are they worth the trouble?”
- “Should I have them in my business?”
- “Should I have every employee sign them or just a select few?”
The reality is that there is no one answer to these questions applicable to every business. The answer for your business depends on a number of factors including the extent of the employee’s exposure to and use of your proprietary information, the nature of the employee’s work, the employee’s compensation, and the overall fairness of the restrictions.
If you think your organization will be hurt by an employee’s departure for a competitor, you may want to consider entering into a reasonable agreement. If the employee’s work is not specialized, does not involve your proprietary information, and there’s not much danger of losing employees or customers because of the employee’s departure, then probably not.
A conversation with your lawyer wouldn’t hurt to sort this out.
What you need to know as an employer about Executive Order 14036:
The question I’ve heard over and over from business owners this month, more than perhaps any other, is whether or not the non-competition agreements they have with their employees are void or soon will be because of this Executive Order. The answer is no. This Executive Order does nothing other than instruct the Federal Trade Commission to “consider” exercising its rule-making authority to limit or restrict the use of these agreements. Nothing has been done yet…and it may be quite some time before any definitive action is taken.
What we recommend, however, is that employers prepare for the storm by:
- Be discerning as to which employees they ask to sign restrictive covenants. (Hint: don’t ask the guy in the warehouse or the receptionist to sign one. As vital as those people are, their jobs don’t rise to the level of needing a covenant to protect the company.)
- Keep the restrictive covenant as narrow as possible – just enough to protect your organization.
- Document the legitimate business reasons for each restrictive covenant. These reasons include specialized training, access to clients, carrying the company’s goodwill, use of the company’s IP, trade secrets, or other proprietary information.
- Keep an eye out for any new guidelines from the FTC so you can stay proactive in your compliance efforts.
Have a question? Give us a call at 410-584-1110.