While noncompete law has largely been a state-level issue, the federal government entered the fray in January 2023 when the Federal Trade Commission (FTC) proposed an outright ban on all noncompete agreements. The controversial move resulted in over 27,000 comments being filed, which then required review. While the FTC is expected to issue its final rule in April, litigation will follow, and the matter is expected to remain unsettled for some time. The National Labor Relations Board (NLRB) also weighed in when, on May 30, 2023, its general counsel declared that noncompete agreements violate the National Labor Relations Act in certain circumstances. Now, NLRB investigators are actively seeking information about noncompete agreements, exposing employers to potential unfair labor practice charges.
State Action
Effective July 1, 2023, Minnesota became the fourth state banning noncompete agreements with very limited exceptions, joining California, North Dakota and Oklahoma. On June 7, 2023, the New York State Senate approved, and the State Assembly ultimately passed, a bill banning all noncompete agreements. While Gov. Kathy Hochul did not sign the bill, she indicated she was open to such bans for employees who make less than $250,000. And this year, California takes the matter one step further: In addition to banning noncompete agreements, California businesses were required to send notice to current and former employees, advising them that any noncompete agreements are rescinded. The law provides for a private right of action — including claims for injunctive relief, damages and attorney fees — if employers fail to comply.
While not banning noncompetes altogether, other states have passed limitations on their use. For example, Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington have banned employers from entering into noncompete agreements with employees earning below certain salary thresholds, which rise annually. Other trends include prohibiting the use of noncompete agreements with nonexempt employees, imposing time limits on noncompete restrictions and requiring employers to provide sufficient notice to employees before signing.
Although noncompete agreements will continue to receive scrutiny, staffing firms can protect their business by using them for appropriate roles that warrant post-employment restrictions. For all other positions, staffing firms can rely on well drafted, narrowly tailored nonsolicitation and nonrecruitment covenants.
Here are three steps you can take to protect your business.
Risk assess your roles. Limit your use of noncompetes for the highest risk roles. Take a thoughtful, metered approach to the use of noncompete agreements. Assess roles across the organization and limit the use of noncompetes to the ones that pose the highest risk based on the level of access to customer, strategic and other confidential information. Ensure the restriction is narrowly tailored to in terms of the duration and geographic scope.
Pay attention to state law. In addition to the legislative trends noted above, some states have common law restrictions that limit the enforceability of noncompete agreements, while other states’ common law generally enforce them more liberally. It is important to know where you can bring an enforcement action and what law will apply. It is critical to implement an advantageous venue selection and choice of law strategy.
Strengthen nonsolicitation and nonrecruitment restrictions. At the end of the day, clients and employees are a staffing firm’s most precious assets. In the absence of a noncompete agreement, it is critical to ensure that you have strong protections in place to prohibit former employees from stealing clients or poaching employees. While it varies by state, courts are more willing to enforce nonsolicitation and nonrecruitment restrictions if they are narrowly tailored to serve a legitimate business interest.
All Is Not Lost
The landscape for noncompete agreements is dynamic and changing, and staffing firms can no longer take a “one size fits all” approach to their employment agreement. Instead, staffing firms should limit the use of noncompetes to only the most important roles and in states where such agreements are lawful. For all others, staffing firms would be well served to rely on carefully drafted nonsolicitation and nonrecruitment restrictive covenants.
