26 Jan The changing landscape for noncompete agreements
Written by Bill Haut
This piece appeared in Inside Indiana Business Jan. 24, 2023
Noncompete agreements, which are agreements that prohibit an employee from working for a competitor or in the same industry for a specific period of time after the employment relationship ends, 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 policy makers.
Such agreements have always been viewed with disdain 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. Employers must, however, be aware that over the last five years, new state laws are shifting the legal landscape for noncompete agreements in favor of employees ,and now the U.S. Federal Trade Commission (FTC) is stepping in, which could result in sweeping changes.
State Limitations Increasing
State law controls the enforceability of noncompete agreements, and since 2018, 18 states have enacted some form of law limiting or banning noncompete agreements, often focusing on prohibiting such agreements for low-wage workers. While these limiting laws are not currently present in Indiana, some common provisions Indiana employers should be aware of include:
- Limiting the use of noncompete agreements to higher paid employees
- Requiring advance notice
- Requiring state law where the employee resides to control the agreement
- Requiring some form of consideration beyond continued employment
Uniform Law Proposed
In July 2021, the Uniform Law Commission adopted the Uniform Restrictive Employment Agreement Act, providing model language for states seeking to address restrictive employment agreements. Wide adoption by the states would provide uniformity across the U.S., but it remains to be seen how many states enact all or a portion of the uniform act. Four states have introduced the act in their respective state legislatures (Colorado, Oklahoma, Vermont and West Virginia), and so far, Colorado is the only state that has enacted portions of the act.
Not only has state action increased over the last five years, but federal officials have also weighed in on non-compete agreements. 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 noncompete agreements with a worker. This is the likely result of President Biden’s July 2021 executive order encouraging the FTC to address agreements that “unduly limit workers’ ability to change jobs.” While it remains to be seen what happens with regard to the FTC’s proposed rule, companies would be wise to take note.
Bottom Line: Employers Must Pay Attention
For employers with workers in multiple states, addressing state variations in noncompete agreements has been a regular part of their compliance world. As remote work has become the norm for a greater share of U.S. workers, more employers must monitor the variations in state law applicable to their workers. Some steps employers should take include:
- Abandoning the “one form fits all” mindset and customizing forms for each state and, even better, specific positions
- Monitoring developments state by state, and now at the federal level
- Evaluating whether current noncompetition agreements apply too broadly, such as to lower wage workers with little or no access to trade secrets or customers
- Substituting less restrictive covenants to protect business interests, such as non-disclosure, non-solicitation, trade secret and anti-raid covenants.
Bill Haut practices employment law at Densborn Blachly LLP. He has served as respected legal counsel supporting businesses and their objectives as both in-house and outside counsel for over 30 years.