Non-compete agreements, which are agreements that prohibit an employee from working for a competitor or in the same industry for a specified post-employment period, have historically been limited to a small group of key employees. Over time, however, employers have applied the restrictions to a broader group of workers, drawing more attention from state and federal policymakers.
Such agreements have always been viewed with contempt by the courts. They remain enforceable in Indiana (and many other states) if the provisions are sufficiently limited in time and scope and protect a legitimate business interest, such as trade secrets and customer relationships. However, employers need to be aware that over the past five years, new state laws have shifted the legal landscape for non-compete agreements in favor of workers and now the US Federal Trade Commission (FTC) is stepping in, which could result in sweeping changes.
State restrictions are increasing
State law governs the enforceability of non-compete agreements, and as of 2018, 18 states have enacted some type of law restricting or prohibiting non-compete agreements, often with a focus on prohibiting such agreements for low-wage workers. Although these restrictive laws do not currently exist in Indiana, some general provisions Indiana employers should be aware of include the following:
- Restricting the application of non-competition clauses to higher-paid employees
- Advance notice required
- Requirement of the law of the country where the worker resides to control the agreement
- Requiring something in return that goes beyond continued employment
Uniform law proposed
In July 2021, the Uniform Law Commission passed the Uniform Restrictive Employment Agreement Act, which provides model language for states looking to address restrictive employment contracts. Widespread adoption by the states would bring consistency across the US, but it remains to be seen how many states will enact all or part of the unified law. Four states have introduced the law in their respective legislatures (Colorado, Oklahoma, Vermont and West Virginia), and so far Colorado is the only state to have enacted portions of the law.
Not only has government action increased over the past five years, but federal officials have also spoken out against non-competition clauses. On January 5, 2023, the FTC announced a proposed rule that would make it unlawful for employers to enter into, or attempt to enter into, a non-compete agreement with an employee. That is the likely outcome of President Biden’s July 2021 executive order calling for the FTC to address agreements that “unreasonably restrict workers’ ability to change jobs.” While it remains to be seen what happens regarding the FTC’s proposed rule, companies should take note.
Conclusion: Employers have to be careful
For employers with employees in multiple states, dealing with state non-compete deviations is an integral part of their compliance world. As remote work has become the norm for a larger proportion of US workers, more and more employers need to monitor differences in state laws that apply to their employees. Some steps employers should take include:
- Break the “one form fits all” mindset and customize forms for each state and, even better, for specific positions
- Monitoring developments from state to state and now at the federal level
- Assess whether current non-competition clauses are too general, e.g. B. for low-wage workers with little or no access to trade secrets or customers
- Replace with less restrictive agreements protecting business interests, such as non-disclosure, non-solicitation, trade secrets, and anti-ambush agreements.
Bill Haut practices employment law with Densborn Blachly LLP. He has been a respected legal advisor for over 30 years, supporting companies and their objectives both as an internal and external advisor.