Non-competition agreements are not doing so hot. Recently, more states have outlawed or tightened restrictions on them, and the federal government has stepped into the fray in policing them. For example, the Federal Trade Commission (FTC) has brought enforcement actions against employers who promulgate or enforce unlawful non-competition agreements as unlawful restraints on trade. Also, the National Labor Relations Board’s (NLRB) General Counsel has directed the Board’s agents to find that non-competition agreements are unfair labor practices except in limited circumstances.

On February 6, 2024, an NLRB regional office settled a charge alleging, among other things, that an employer’s non-competition agreements constituted unfair labor practices. After the Board refused to dismiss the charge, the employer settled and agreed to void its agreements, pay back pay to employees, and notify all employees about the settlement. More recently, on April 8, 2024, the NLRB’s General Counsel suggested that employees who are sued by an employer attempting to enforce an unlawful non-competition agreement may be entitled to recover their legal fees and costs incurred to defend against the lawsuit. The General Counsel also said that she would provide additional guidance “regarding remedial relief involving non-compete and other restriction provisions” soon.

The law governing non-competition (and similar) agreements differs significantly among jurisdictions. Except for jurisdictions where nearly all non-competition agreements with employees are unlawful (cough, California), there are five general rules that all employers should consider when evaluating non-competition agreements:

1. One-Size-Fits-All Agreements Are Never Recommended.

Employers should not use “form” non-competition agreements that all employees sign when hired or include similar language in handbooks. Differences in several factors specific to individual employees – such as work location, job duties, value of investment or training, access to confidential information, compensation, or length of employment – may affect the enforceability of a non-competition agreement. It is nearly impossible to draft such an enforceable “one-size-fits-all” agreement that accounts for all these differences for all employees.

Additionally, form non-compete agreements will likely raise eyebrows with the FTC and NLRB. By their nature, these “form” agreements are not “narrowly tailored” as required by the NLRB or the FTC’s proposed rules. Employers that rely on one-size-fits-all agreements should immediately work with counsel to eliminate restrictions applicable to all employees and, instead, evaluate whether they really need a restrictive covenant for specific employees.

2. Evaluate Whether You Really Need a Non-Competition Agreement.

Employers get in the most trouble with non-competition agreements when they bind employees to non-competition agreements for no good reason. Under most states’ law, an employer must have a legitimate business reason for a non-competition agreement with an employee. See, e.g., Fla. Stat. § 542.335. Employers will rarely prove they have a legitimate business interest in non-competition agreements with most non-supervisory, blue-collar, or lower wage employees. Some jurisdictions have memorialized this rule by outlawing non-competition agreements for lower wage workers. See, e.g., Colo. Rev. Stat. § 8-2-113; Va. Code § 40.1-28.7:8; DC Code §§ 32-581.01 et seq.

The federal government’s recent initiatives have also sought to prohibit non-competition agreements when the employer has no legitimate interest in it. When explaining an executive order encouraging the FTC to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility, the Biden administration explained:

[R]oughly half of private sector businesses require at least some employees to enter non-compete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs, not just high-level executives. [President Biden] believes that if someone offers you a better job, you should be able to take it. It makes sense.

The thrust of the state and federal governments’ recent actions to restrict non-competition agreements is to force employers to not seek the agreements with employees who pose little (or no) competitive risk. To ensure non-competition agreements are enforceable and avoid the risks associated with seeking unenforceable agreements, employers must evaluate whether they actually need a non-competition agreement with employees. Factors that may help to determine whether an employer needs a non-competition agreement include the risk that employees will use confidential information or relationships developed with the employer’s investments to unfairly compete against the employer on their own or for a competitor. The risk of a competitor poaching employees or the costs of employee turnover are not factors an employer should consider by themselves. This evaluation should be done with an employment attorney who knows what is and is not a legitimate reason for a non-competition agreement.

3. While Non-Solicitation, Confidentiality, or Other Agreements May Provide Alternative Protection, These Agreements are Not Beyond Legal or Regulatory Scrutiny.

There are other types of agreements that employers may use in addition to a non-competition agreement or as alternatives to such an agreement, including:

a. Non-solicitation agreements that prohibit an employee from soliciting certain customers or employees.

These agreements are beneficial because, in most cases, they are not contrary to public policy, and it is more likely a court will enforce them. Employers must be cautious because a court may consider an overbroad non-solicitation of customers agreement no different than a non-competition agreement if it precludes an employee from working for any competitors. Also, proving a former employee solicited customers or employees is usually more difficult than proving breach of a non-competition agreement. Former employees who breach these agreements rarely do so in the open. Employers who want to rely on these agreements should ensure they are narrowly drafted and they have policies in place to ensure compliance (e.g., monitoring of employee’s use of its email systems).

b. Confidentiality agreements may prohibit an employee from using or disclosing certain information belonging to the employer.

Similar to non-solicitation agreements, courts do not view these agreements as contrary to public policy. However, under the NLRB’s decision in McLaren Macomb, 372 NLRB No. 58 (2023), agreements that require non-supervisory employees to keep information concerning wages, hours, or working conditions confidential may be unlawful under the National Labor Relations Act. As a result, employers with confidentiality agreements with non-supervisory employees must ensure they are narrowly tailored and disclaim any intent to interfere with employees’ rights under the National Labor Relations Act.

c. Garden leave agreements may prohibit an employee from working for a competitor while the employee remains employed but does no work for a period of time.

Garden leave usually requires a contract between an employer and employee that requires either party to provide notice before the termination of employment. During the notice period, the employee remains employed, but is relieved of all duties and cannot compete against the employer during the period. Because the employer must provide notice before the termination of employment, it may alter the at-will employment relationship. Carlson v. Arnot-Ogden Mem’l Hosp., 918 F.2d 411 (3rd Cir. 1990) (finding that a notice provision in an employment contract is “antithetical to the very definition of employment at-will”). Generally, garden leave only makes sense for executives.

4. If You Have Unenforceable Restrictive Covenants with Employees, You Should Communicate to Employees That You Will Not Enforce Them or, If Possible, Modify Them in Consultation with Legal Counsel.

Guidance from the FTC and NLRB suggests that, if an employer has entered into unenforceable non-competition agreements, maintaining the agreements is unlawful regardless of whether the employer actually enforces them. If an employer believes it may have entered into unlawful non-competition agreements, it should retain counsel to determine whether the agreements are enforceable. In consultation with counsel, the employer should determine whether it should notify employees it will not enforce the non-competition agreements or, if possible, seek to amend the agreements to make them enforceable.

5. Focus Time and Efforts on Retaining Employees and Protecting Trade Secrets.

Employers who take care of their employees rarely need to worry about employees departing and competing against them. Instead of spending time and money to limit employees’ ability to work with a competitor or solicit customers and employees, employers would be better served to improve employee retention. Improved retention has all the benefits of low turnover, while also naturally avoiding the risk of unfair competition from a departing employee.

While improving employer retention will result in reduced risk of unfair competition, employers must also protect the confidential information that gives them a competitive advantage. Normally, employers define trade secrets too broadly to include all confidential information under the sun. A more effective strategy is for an employer to deliberatively and carefully evaluate the information that is not public and provides them with a definite competitive advantage. Employers should carefully define that information and who may access that information. For employees that do have access to trade secrets, the employer should consider a narrowly tailored agreement that prohibits the use or disclosure of the trade secrets.

If an employee with access to trade secrets does leave to work for a competitor, some states allow an employer to argue the employee should not work for the competitor (or only work in certain roles) because the employee will inevitably disclose the trade secrets while working for the competing employer.

The landscape of restrictive covenants, including non-competes, non-solicitation, and confidentiality agreements, is constantly evolving. Employers should routinely review and refresh these agreements to ensure they are compliant with state law. If you have any questions about the enforceability of your employment agreement, the labor and employment team at Spilman are able to assist.