Grant Collins
Over the summer, federal regulators set their sights on employment agreements that contain promises by employees to refrain from competing with their employer after they leave (i.e., “non-competition” or “non-compete” provisions) or promises by employees to refrain from soliciting their coworkers to leave the company (i.e., “anti-raiding” provisions). Importantly, these prohibitions generally do not apply to employer efforts to protect confidential information — such as via non-disclosure, confidentiality, trade secret or non-solicitation agreements — and, as a result, these types of agreements remain valid and enforceable.
With respect to non-compete and anti-raiding provisions, however, the Federal Trade Commission (FTC) issued a final rule effectively banning all existing non-compete agreements and prohibiting new non-competes. At the same time, the National Labor Relations Board (NLRB) has sought to invalidate non-compete and anti-raiding provisions by prosecuting unfair labor practice charges against employers who include these provisions in their employment agreements.
Following the Supreme Court’s recent decision limiting federal regulatory power, federal judges have been at odds with federal regulators over whether regulators have the authority to issue expansive new workforce rules. To help SMACNA contractors stay on top of these new developments, we have provided a summary of these new rules targeting non-compete and anti-raiding provisions as well as the status of any legal challenges.
The FTC Ban on Non-Competes Is “On Hold”
On April 23, the FTC issued a final rule effectively banning all existing non-compete agreements and prohibiting new non-competes. Employers were also required to notify all affected employees that their existing non-competes were no longer enforceable. The FTC Rule was scheduled to go into effect on Sept. 4.
The FTC Rule defined a “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from (A) seeking or accepting work in the U.S. with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (B) operating a business in the U.A. after the conclusion of the employment that includes the terms or condition.” It further defined “term or condition of employment” as including but not limited to “a contractual term or workplace policy, whether written or oral.” Non-solicitation of an employer’s clients or employees was not explicitly included in the definition of “non-compete clause.”
In the months before the Sept. 4 effective date, there were dueling court decisions regarding the validity of the FTC Rule.
Then, on Aug. 20, a federal judge in Texas held that the FTC lacked the statutory authority to issue the FTC Rule and that it was arbitrary and capricious. Importantly, the federal judge held that the FTC Rule needed to be “set aside” in its entirety and “the Rule shall not be enforced or otherwise take effect on its effective date of Sept. 4.”
It is expected that the FTC will appeal the decision to the Fifth Circuit and it may eventually end up before the U.S. Supreme Court. However, at this point, the FTC Rule did not go into effect on Sept. 4, and contractors are not yet impacted by the rule.
NLRB Targets Non-Compete and Anti-Raiding Provisions
Rather than issue an administrative rule, back in May of 2023, the NLRB General Counsel issued Memorandum 23-08 (GC Memo), which focused on the legality of non-compete and anti-raiding provisions under the NLRA.
The GC Memo argued that, with few exceptions, non-compete agreements should be deemed unlawful because they can “chill” employees from engaging in activities protected under Section 7 of the National Labor Relations Act (NLRA). Section 7 guarantees employees, whether unionized or not, the right to organize, bargain collectively and participate in other concerted activities for mutual aid or protection.
The GC Memo emphasized that non-compete agreements could deter employees from leaving their jobs to seek better working conditions, organizing or joining unions or even discussing job opportunities with competitors — all actions protected by the NLRA. While the GC Memo primarily targeted non-compete agreements, it left open questions regarding the status of anti-raiding provisions. Generally speaking, anti-raiding provisions prohibit employees from “soliciting” or “recruiting” their other co-workers for a different employer.
In a recent case, an NLRB administrative law judge (ALJ) found that, under the NLRA, specific non-compete and anti-raiding provisions in an employment contract were unlawful for employees who were not “supervisors” or “managers” as defined by the NLRA. The decision is significant because it applied the NLRB’s new Stericycle framework, which evaluates work rules from the perspective of an employee who is economically dependent on their employer.
The ALJ concluded that the non-compete and anti-raiding provisions in the employment agreement unlawfully “chilled” employees from engaging in protected activities because the provisions were overly broad. The decision was limited to the specific provisions at issue in the case and the ALJ did not conclude that all non-compete and anti-raiding provisions are unlawful.
The ALJ ordered the employer to rescind the unlawful non-compete and anti-raiding provisions and notify current and former employees that they were no longer enforceable. The provisions were:
- An anti-raiding provision intended to prevent “pirating” by prohibiting employees during their employment and for twenty-four months after separation from “solicit[ing], encourag[ing], or attempt[ing] to persuade any other employee of [the] Employer to leave the employ of [the] Employer.”
- A non-compete provision that prohibited former employees for 12 months following separation from “directly or indirectly” engaging in or working for “any other business similar or competitive with [the] Employer’s business.”
- A provision that required the employee to report “any and all offers or solicitations of employment that [the] Employee may receive from third-parties” and that did not include a limitation for union or other protected activity.
It is important to note that the ALJ’s decision is not final. The case is still pending on appeal before the NLRB in Washington, D.C., which has yet to issue a decision.
After the NLRB issues its decision, the employer will have the opportunity to challenge the decision in a federal court of appeals. The appeals court will examine the NLRB’s decision in light of the Supreme Court’s recent decision and determine whether the NLRB acted in accordance with federal law.
This appeal process could last more than one year. In the interim, though, employers will likely continue to face unfair labor practice charges from their former employees arguing that the employer’s non-compete or anti-raiding provisions violate the NLRA.
Don’t Forget State Law
Lost in the back-and-forth between federal courts and federal regulators is the fact that many states have laws restricting the use of non-compete provisions. Like the federal regulations outlined above, these state prohibitions generally do not apply to employer efforts to protect confidential information — such as via non-disclosure, confidentiality, trade secret or non-solicitation agreements.
Specifically, four states have near total bans on non-compete agreements:
- California,
- Minnesota,
- North Dakota, and
- Oklahoma
There are some exceptions, such as in the sale-of-business context, but regardless of the FTC Rule or the NLRB’s position, employers are still subject to state laws prohibiting non-compete agreements.
Ten more states have laws significantly restricting the use of non-compete agreements:
- Colorado
- Illinois
- Maine
- Maryland
- Massachusetts
- Nevada
- New Hampshire
- Oregon
- Virginia
- Washington
Each law is different, but these states generally permit non-compete agreements with employees who earn a certain amount of income, those who are non-exempt (vs. hourly), and those who perform certain job duties.
Because each state law is different, it is important to engage with local counsel to ensure that any non-compete agreement is lawful and enforceable under the contractor’s state requirements.
Bottom Line
There is a growing intolerance for non-compete and anti-raiding provisions in employment agreements. Federal regulators have targeted new enforcement initiatives and federal rules to combat what they view as provisions that limit employees’ rights.
For contractors, these developments are a clear signal to re-evaluate any use of such provisions.
If a contractor still wants to move forward with an employment agreement that includes a non-compete or anti-raiding provision, it is important to engage with competent counsel to ensure that your agreement can withstand any potential legal challenge.
Grant Collins is a specialist in labor and employment law at Felhaber Larson. Reach him at gcollins@felhaber.com.
