Momentum growing against non-compete clauses

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Are non-compete clauses on the way out?

While they are still legally binding in Pennsylvania, four states, including California, have passed laws that either ban or restrict the use of non-compete agreements in employment contracts; and recent statements made on the national level have many wondering if the bans will spread.

A non-compete clause is generally placed in an employment contract between an employer and a worker.

The agreement prevents the worker from seeking or accepting employment in the given industry for a set period – generally about two years.

While they can be an important tool in protecting the intellectual property and financial investment made by the employer, some say they are used too broadly, hurt career prospects and cost employees money they should be entitled to.

Jacob Sitman, an attorney with Fitzpatrick Lentz and Bubba in Allentown, said much has happened this year to indicate that anti-competitive agreements have fallen out of favor and more bans and regulations may be on the way.

In January, the Federal Trade Commission proposed a new rule which would ban the imposition of non-compete clauses in contracts.

In the proposal, the FTC estimated that the new rule could save workers nearly $300 billion per year and expand career opportunities for about 30 million Americans.

In February, a bipartisan group of U.S. senators proposed what they called the Workforce Mobility Act of 2023, which would largely ban non-compete clauses and in May, Jennifer Abruzzo, general counsel for the National Labor Relations Board issued a statement that the board discourages non-compete clauses and views them as unlawful.

Sitman said he expects a trickledown effect from the growing hostility to the non-compete agreements and sees more states eyeing banning or regulating them.

He said there are both positives and negatives that could come from changes to employment law, and things employers should keep in mind as they look to the possibility of more regulations on the practice.

For starters, he said an employer can help protect itself by more narrowly implementing its use of non-compete agreements, so they aren’t broad and overreaching, affecting employees for which they are inappropriate.

Some regulations that have been proposed so far include limiting non-competes to those employees earning six figures or more.

“There’s no good reason to restrict someone who doesn’t make a lot of money,” Sitman said. “You don’t need a non-compete agreement for a janitor, for example. You certainly shouldn’t be giving it to all your employes. In that case you’re sinking your own ship.”

He doesn’t think a total ban is coming, and that many would consider that unreasonable as businesses do have things they need to protect, but any regulations would impact legal action over alleged breaches in non-compete agreements.

It would bolster employee’s efforts to file a complaint over unfair labor actions and the FTC or NRLB could decide to investigate and seek a remedy in federal court.

Sitman emphasized that non-compete agreements are still legally binding in Pennsylvania, he said he has seen confusion from clients who assume that they are no longer enforceable. They are.

There’s also no immediate change coming to Pennsylvania. While there are various bills pending in committees in the state’s legislature that could place various restrictions on non-compete agreements, there is no change in the law.

However, he said, “the momentum is certainly growing in one direction,” and employers and employees should expect changes in the law on the horizon.