On October 25, 2016, the Obama administration released a fact sheet announcing the steps that the White House is taking to “enhance competition to benefit consumers, workers, and entrepreneurs.” The administration’s actions come in response to President Obama’s April 15 executive order: Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy. The new announcement referenced the administration’s “call to action” and accompanying “set of best practices for state policymakers to enact reforms to reduce the prevalence of non-compete agreements.”
The two-page call to action, entitled: “State Call to Action on Non-Compete Agreements,” relies on White House and Department of Treasury reports to conclude that non-compete agreements are an “institutional factor that has the potential to hold back wages and entrepreneurship.” According to the research cited in the call to action, “states that strictly enforce non-compete agreements have lower wage growth and lower mobility than states that do not enforce them.” As a result, “the White House is calling on state policymakers to join in pursuing best-practice policy objectives.”
Best-Practice Policy Objectives
The call to action notes that states like California, North Dakota, and Oklahoma have already enacted laws that “curtail abusive and unfair agreements,” rendering non-compete agreements signed by employees in these states, void and unenforceable.” To promote compliance and enforcement, the call to action suggests that states also “assign appropriate remedies or penalties for employers that do not comply with state non-compete statutes.”
The call to action also notes that several states have considered passing legislation that either bans non-competes or changes how they are regulated. With regard to states that enforce non-competes, the call to action lists the following three best practices to “help ensure that workers can move freely from job to job, without fear of being sued.”
1. Banning Non-Competes for Certain Workers
The first suggestion is to ban employers from using non-compete clauses for certain categories of workers. Examples include workers who make less than a certain wage, those in certain public health and safety-related occupations, workers who are unlikely to have trade secrets, and workers “who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.”
2. Increasing Transparency and Fairness
The second suggestion aims at improving transparency and fairness by prohibiting employers from using or proposing non-competes after an employee has accepted a job offer or significant promotion, reasoning that “an applicant who has accepted an offer and declined other positions may have less bargaining power.” Other examples include providing some form of consideration that is beyond mere continued employment and “encouraging employers to better inform workers about” their state non-compete laws, the existence of non-competes, and how they work.
3. Incentivizing and Encouraging Enforceable Contracts and Clauses
The third suggestion is to provide employers with incentives to write enforceable contracts and to encourage employers to eliminate unenforceable provisions. Examples include “promoting the use of the ‘red pencil doctrine.’”
Focus on Antitrust Laws
The fact sheet also references the guidance that the Department of Justice and Federal Trade Commission recently issued regarding antitrust laws. This guidance was issued on October 20 “to alert human resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of the antitrust laws.”
A State-by State Guide to Non-Competes
The administration also provides a link to a state-by state explanation of non-compete laws entitled: Non-Compete Reform: A Policymaker’s Guide to State Policies. This guide includes information on the current state statutes governing non-compete laws and their enforceability. The guide also lists which occupations each state exempts from its non-compete laws and the three enforcement doctrines used by states that allow courts to determine the enforceability of non-compete clauses.
The Case for Action
The fact sheet cites reduced competition in the labor market as a cause of lower wages and increased income inequality, and possibly lower employment rates. Greater competition, the fact sheet reports, can lead to higher wages, increased hiring, greater economic opportunity, and fairness for workers. Showing his support, Vice President Joe Biden commented in a recent statement that “(workers) can’t reach their true potential without freedom to negotiate for a higher wage with a new company, or to find another job after they’ve been laid off.”
Key Takeaways
This approach by the White House conforms with the recent almost unanimous passing of the federal Defend Trade Secrets Act of 2016, which many view as an attempt by the administration to balance the limited use of non-compete agreements with a powerful new tool for protecting a company’s trade secrets, which is often the stated basis for using non-competes to begin with.
