Are the days of non-compete agreements coming to an end?
The Biden administration issued an executive order asking the Federal Trade Commission to address agreements that overly restricts an employee’s ability to change employers. States are increasingly banning or restricting the use of non-compete clauses in employment contracts. The courts are also siding with employees – even high-ranking executives – over unreasonable non-compete clauses.
Change is in the air, but non-competes remain a tool used by many employers throughout the country.
If you are in an employment contract dispute, including non-compete clauses, contact our experienced team at Shellist Lazarz Slobin.
Appeals Court Sides with Executive in Non-Compete Case
In ADP, Inc. v. Levin, the U.S. Third Circuit Court of Appeals affirmed on April 21, 2022, a district court’s denial of a preliminary injunction against a senior ADP executive.
ADP was seeking a preliminary injunction against former employee Matthew Levin for an alleged breach of his non-compete agreements. Levin has resigned from his Chief Strategy Officer position at ADP to take over the Chief Executive Officer position at ADP competitor Benefitfocus.
The appellate court agreed with ADP that the district court erred in its reasoning yet still upheld the lower court's decision based on other grounds. The Third Circuit said that ADP did not demonstrate irreparable harm and concerns about losing clients or referral business were only speculative.
The rulings by both courts show a potential shift in judicial inclinations. Historically, a senior executive was usually bound by their non-compete if they left to take a job at a major competitor.
States Placing Limits on Non-Competes
Many states have passed laws in recent years that either restrict or outright ban non-compete clauses. Limits on how long a non-compete can be in effect or what type of employee can be subjected to one are among the restrictions.
A brief overview of state-level regulations follows:
- California: All non-compete clauses are banned in employment agreements. California also voids any agreement that in any way limits an employee’s ability to find future employment.
- Colorado: This state law bans non-competes and other trade provisions except in stated exceptions (including the sale of a business).
- Illinois: Employees earning less than $75,000 can be under a non-compete. Employees making less than $45,000 are also immune from non-solicit clauses.
- Maine: Employees earning less than 400% of the federal poverty line are not subject to non-compete clauses.
- Maryland: Lower-wage earners – the equivalent of $15 per hour – cannot be held to a non-compete agreement.
- Massachusetts: Non-compete restrictions cannot extend more than 1 year post-separation.
- Nevada: Non-competes are banned for all hourly wage earners.
- New Hampshire: Low-wage earners cannot be subject to non-compete agreements.
- Oregon: A non-compete is unenforceable for employees who are classified as non-exempt and/or earn $100,533 or less per year. Non-compete clauses cannot exceed 12 months from the time the employee leaves.
- Rhode Island: Non-competes cannot be enforced against employees classified as exempt, a low-wage earner (based on poverty guidelines), younger than 18, or a college student intern.
- Utah: This state limits non-competes to one year in duration.
- Washington: Non-compete clauses are unenforceable for an employee compensated less than $100,000 annually.
- Washington, D.C.: All non-competes are banned. Employers also cannot prohibit an employee from working simultaneously for another employer in a side job.
FTC May Curtail Use of Non-Competes
In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. The order encouraged the FTC to use its statutory rulemaking authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Only time will tell what, if anything, the FTC does to limit non-competes on a national level.
Non-Compete Clauses in Texas Employment Contracts
Texas is no fan of any contract that limits an employee’s ability to change jobs as evident in the Texas Free Enterprise and Antitrust Act of 1983. The state does, however, recognize the need for reasonable clauses that protect company goodwill and confidential information.
What is “reasonable” is subjective but pertains to limitations of time, geographical area, and scope of activity. In a dispute, the employer must show how non-enforcement would harm the business. The employer must also demonstrate that enforcing the non-compete would not severely restrict the person’s right to practice a profession or trade or otherwise make a living.
Fighting Unfair Non-Compete Agreements
Across the U.S. legislation and court rulings are shaping how non-competes are used and enforced. At Shellist Lazarz Slobin, we keep a watchful eye on developments that affect both employees and employers. Employment law is evolving rapidly.
If you believe you are being constrained by an unfair non-compete clause, schedule a consultation with one of our attorneys. We can evaluate your case and suggest potential next steps. Call (713) 352-3433 to learn more.