Erickson, Brown & Kloster, P.C. Newsletter for Thursday, July 29, 2021
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Executive Order Targets Noncompete Agreements

 

These days, many employees at companies large and small are asked to sign an agreement when they're onboarded. It says that they're not allowed to work for a competing company, or to start a competing company, for a certain number of years after they part ways with their current employer.

Once a rare practice restricted to specialized employees in industries where trade secrets and corporate espionage are areas of concern, noncompetes are affecting lower-wage workers as well: somewhere between 36 million and 60 million workers have signed them, according to a 2016 report by the Economic Policy Institute. If properly enforced, these agreements make it impossible for an employee to quit his or her job in favor of a better-paying job in the same industry. That's why the White House has issued an executive order taking aim at this practice. What does that mean for the average worker?

The order

The President's order, issued on July 9, 2021, makes it clear that anticompetitive behavior by corporations is a concern for the White House. Not only has consolidation by large companies driven up prices for consumers, but the administration argues that it has also driven down wages for employees. That's why, among other provisions, the latest order encourages the FTC to ban or limit non-compete agreements.

What it means for employees

This executive order, while non-binding, is a rare federal initiative that addresses noncompetes. All other laws on the subject are at the state and local level. In three states – California, North Dakota, and Oklahoma – noncompetes are already completely illegal, and other states limit their use under some circumstances. However, these laws are frequently ignored. By making the signing of a noncompete a condition of employment, companies can force employees to sign.

Enforcing those agreements, on the other hand, is difficult. The company can threaten employees with legal action or arbitration, but the upshot of such cases tends to depend on how much time and money the employee has to fight it. That's why some legal experts are in favor of a blanket ban on the contracts nationwide. However, it's more likely that the FTC will choose a more nuanced approach, perhaps banning them only for unskilled work. That would protect the most vulnerable workers without imperiling any genuine trade secrets.

Whatever the FTC decides, this executive order lays out the administration's priorities clearly. The White House will continue to prioritize the rights of workers over those of corporate interests.

For now, employers should review their policies with qualified professionals and be prepared for regulatory changes in the future.

 
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