Faruqi Law Explains the Impact of the Non-Compete Clause

The non-compete agreement has been a popular feature of employment contracts for several years. Businesses use non-compete agreements to keep their employees from later becoming employed by a competitor. These employment contracts prevent employees from entering professions or markets that are considered to be in direct competition.

Noncompete agreements can be enforced with an employee’s time with a company ends. The employer then wishes to keep the employee from competing against them in a position in another company, whether they are working for a competitor in the market or starting a new company. Businesses are especially concerned about others starting new companies in the same industry and poaching employees from the original employer.

Many states have recently amended their laws regarding non-compete agreements and how they can be reinforced. Faruqi & Faruqi LLP explains examples of the newer state laws and their enforceability.

Enforceability of Non-Compete Agreements

Many states want to limit the enforceability of non-compete agreements. These states view the non-compete agreement as an onerous and severe restriction on business competition. These agreements can make it virtually impossible for employees to find new positions after leaving a company. Since non-compete agreements prevent employees from working in the same industry, they lose the ability to practice their hard-earned skills and cannot find comparable work with similar pay.

Many states limit non-compete agreements to specific professions. These states view these types of professionals as having vital importance to their state, and they want to ensure that these professionals can freely change jobs and remain in the same field or geographic area.

Examples of Enforceability of Non-Compete Agreements

States such as Alabama exempt professions like doctors, veterinarians, and lawyers from non-competes. In Alabama, a non-compete clause can only be added to an employee’s contract after employment has begun.

Several states, including Arizona, Connecticut, the District of Columbia, Illinois, Maine, Maryland, and Washington, exempt broadcast professionals from all non-compete agreements.

California

In California, non-compete clauses are not enforceable. The non-solicitation of customers clauses are only enforceable when customer’s identities are classified as trade secrets. Non-disclosure agreements are permitted in California to prevent the use or disclosure of confidential information and trade secrets.

Colorado

In Colorado, non-compete agreements are also not enforceable. Similar to California’s law, some provisions of these clauses are enforceable when they involve contracts for the purchase or sale of a business or its assets.

Louisiana

In Louisiana, auto salespersons and real estate brokers are exempted from non-compete agreements. Any non-compete agreements must be limited to specific municipalities or parishes. They are not enforceable after two years.

Montana

In Montana, a non-compete clause is not enforceable except during the sale of a business. Employers are permitted to put non-disclosure agreements into place to protect their confidentiality agreements and trade secrets.

North Dakota

In North Dakota, non-compete clauses are not generally enforceable. This does not apply when a business is being sold or when dissolution occurs. Non-disclosure agreements are permissible.

Oklahoma

In Oklahoma, the non-compete clause is not allowed. Non-solicitation agreements are permitted, but prohibitions on former employees or independent contractors hiring or employing these individuals could be enforced.

Oregon

In Oregon, there are complex rules regarding the enforcement of non-compete clauses. Employers must provide a two-week notice before enforceability is granted. Non-compete clauses are only enforceable for salaried employees.

Non-compete agreements cannot be enforced against employees whose income is less than the median income of a four-person family in Oregon, according to the most recent figures from the Census Bureau.

Recent Developments

In recent years, non-compete clauses have been under attack by anti-trust laws. In 2017, the Department of Justice announced a change in enforcement policy, meaning that it would scrutinize and possibly criminally prosecute no-poach and wage-fixing agreements. State attorneys general have advocated for strong federal action and passed state laws prohibiting these clauses’ enforcement.

Federal Trade Commission (FTC)

The Federal Trade Commission (FTC) has also taken action against non-compete clauses. A potential rule would limit or eliminate the use of non-compete clauses in employment agreements.

Low-wage employees, particularly in restaurant franchises, frequently find themselves caught up in non-compete agreements. A competitor’s definition can damage these employees’ chances of finding new jobs for which they are qualified.

Pending Legislation

Several legislative initiatives are in the works that could protect employees from the damaging effects of non-compete clauses. The Senate’s Workforce Mobility Act, entered in 2019, would eliminate the use of non-compete agreements except in the case of business sales and the dissolution of partnerships. Senators believe that non-compete agreements stifle career agreement, innovation, business creation, and wage growth.

Understanding the Impact of the Non-Compete Clause

Non-compete clauses may have a dangerous effect on low-wage workers, especially those working for fast-food franchises. Higher-paid workers are also at a disadvantage when they are forced to sign non-compete clauses. However, business leaders believe that these rules are necessary to protect their company secrets and keep former employees from poaching their current employees.

Faruqi Law wants employees to understand the terms of their non-compete clauses and to understand how these clauses could affect their present and future employment situation. 

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