Why it matters

Seeking to reduce the prevalence of non-compete agreements, President Barack Obama released a call to action encouraging employers not to use them in order to “enhance competition to benefit consumers, workers, and entrepreneurs.” The “State Call to Action on Non-Compete Agreements” characterized such agreements as an “institutional factor that has the potential to hold back wages and entrepreneurship,” claiming that states that strictly enforce them have lower wage growth and lower mobility than states that do not enforce them. Some states—including California, North Dakota and Oklahoma—have enacted laws to curtail abusive and unfair agreements, the Call to Action noted, while at least a dozen others have considered reform. For those states that continue to enforce the agreements, President Obama called on state policymakers to follow three “best practices”: banning non-compete clauses for certain categories of workers (such as those under a certain wage threshold and those that are unlikely to possess trade secrets), improving the transparency and fairness of non-compete agreements, and incentivizing employers to write enforceable contracts.

Detailed discussion

Taking a stance on non-compete agreements, President Barack Obama released a call to action asking state policymakers to pursue “best practice policy objectives” if they elect to enforce such agreements.

Earlier this year the President launched an initiative intended to stoke competition, with reports from the White House and Treasury as a result. Those reports found non-compete agreements are an “institutional factor that has the potential to hold back wages and entrepreneurship,” according to the State Call to Action on Non-Compete Agreements, impacting nearly one in five workers, or approximately 30 million employees.

“Most workers should not be covered by a non-compete agreement,” the Call to Action declared. “Though each state faces different circumstances, we believe that employers have more targeted means to protect their interests, that non-compete agreements should be the exception rather than the rule, and that there is gross overuse of non-compete clauses today.”

The primary rationale behind non-competes is to prevent workers from transferring trade secrets to rival companies, but “a considerable proportion come at the expense of workers, entrepreneurship, and the broader economy,” the Call to Action stated. “Researchers have found that states that strictly enforce non-compete agreements have lower wage growth and lower mobility than states that do not enforce them.”

Several states—such as Illinois, Utah and Washington—have recently considered reforms on the subject, including legislation regulating non-competes as well as outright bans, with three states—California, Oklahoma and North Dakota—making the agreements generally void and unenforceable.

For those states that continue to enforce the agreements, the Call to Action set forth three “best practice” policy objectives, beginning with a ban on non-compete agreements for certain categories of workers. Employees under a certain wage threshold, workers in certain occupations that promote public health and safety, employees who are unlikely to possess trade secrets and those who may suffer undue adverse impacts (including workers laid off or terminated without cause) should not be subject to non-competes, the Call to Action declared.

Employers should also improve the transparency and fairness of non-compete agreements, the document stated, with the agreements being prohibited unless they are proposed before a job offer or significant promotion has been accepted or by providing consideration over and above continued employment for those workers who sign the agreements.

Finally, the Call to Action suggested that employers should be incentivized to write enforceable contracts, with states promoting the use of the “red pencil doctrine,” for example, which renders contracts with unenforceable provisions void in their entirety.

“To promote compliance and enforcement, states should assign appropriate remedies or penalties for employees that do not comply with state non-compete statutes,” the Call to Action concluded. “In adopting these strategies, states can help ensure that workers can move freely from job to job, without fear of being sued. … As states move to ensure free labor market competition, non-compete reform should be considered as one important tool.”

Elected officials in Connecticut, Hawaii, Illinois, New York and Utah already signed on to support the policy, with New York Attorney General Eric Schneiderman issuing a press release promising to introduce legislation next year “to curb the rampant misuse of non-compete agreements.” AG Schneiderman has already taken action against employers over the use of the agreements, reaching a deal with restaurant chain Jimmy John’s earlier this year in which the company promised to stop using the agreements for minimum wage workers in the state.

In addition to the Call to Action, the Administration released a fact sheet and called on Congress to pass federal legislation to eliminate non-competes for workers under a certain salary threshold.

To read the Call to Action, click here.

To read the fact sheet, click here.