State Laws Could Offer Precedents for Potential FTC Rulemaking on Non-Compete Agreements

Last week, President Biden signed a far-reaching executive order that includes a directive to the Federal Trade Commission to limit or ban non-compete agreements.  The question for large companies will be the potential breadth of such a ban, with existing state laws in this area varying substantially.

The order, which does not have the force of law or regulation but rather serves to provide direction to federal agencies, does not specify how and what actions the FTC should take.  However, statements from the White House indicate non-compete restrictions would be significant and could cover nearly all entry- and mid-level employees. 

There is a wide range of existing state regulations on the use of non-compete agreements and a broad body of state law requiring non-compete agreements to be reasonable in scope and duration. The trend at the state level has been toward greater restrictions on the use of non-compete agreements, such as in Illinois.  Click here for more detail on the various state laws regulating non-compete agreements.

• California, Oklahoma, North Dakota, and the District of Columbia prohibit them in nearly all cases;
   
• Hawaii prohibits them for high-tech workers;
   
• Illinois, Maryland, Massachusetts, New Hampshire, Maine, and Rhode Island have prohibited them for nonexempt employees or employees making less than $50,000 (the actual income level varies in each state);
   
• Idaho does not prohibit them, but has shifted the burden of proof to the former employer to prove harm; and
   
• Washington prohibits them for employees making less than $100,000.

Outlook:  The FTC is expected to issue regulatory guidance as early as this fall, with final regulations promulgated next year.  HR Policy and the Center On Executive Compensation will continue to articulate concerns about a blanket ban on non-compete agreements and will inform stakeholders of the legitimate business needs for such agreements, particularly for high-level executives and critical employees (such as research and development or those with access to trade secrets).