White House Urges Reform of Use of Non-Compete Agreements

By: Megan J. Muoio, October 31, 2016

On October 25, 2016, the White House issued a “call to action” to states regarding non-compete agreements. The call to action was the result of the White House’s May 2016 analysis of the usage, potential issues, and state responses to the implementation of non-compete agreements by private employers, which was based on a report from the United States Treasury Office of Economic Policy regarding the economic impact of the use of non-compete agreements on the labor market and the U.S. economy in general. The White House concluded that, although non-competes can protect trade secrets and can be used to spur employers to invest in specialized employee training, they are often overused and an unjustified restriction on worker mobility.

Fewer than half of workers who have non-competes report possessing trade secrets, and many workers who have non-competes work in fields in which they are not in possession of trade secrets or specialized training, such as personal services. Many employers are requiring entry-level or lower wage workers to sign non-competes in an attempt to limit employees’ job mobility and hamper competition in the labor market. Employers predominately ask employees to sign non-compete agreements only after the employee has accepted a job offer and offer no additional consideration. Employees often sign these agreements without understanding their implications or assessing their enforceability. Moreover, the overuse of non-compete agreements can create unintended consequences. For example, workers who have been laid off may be prohibited from finding employment in their field due to a non-compete agreement. The White House highlighted individual state legislative efforts to curtail the use of non-compete agreements and called on all states to enact legislation to restrict the unnecessary use of non-compete agreements.

New York Attorney General Eric T. Schneiderman has proposed legislation limiting the use of non-compete agreements by New York employers. The Attorney General’s office has been active in this area, entering into three settlements with employers in 2016 who had required that their employees enter into overbroad or unnecessary non-compete agreements. The most recent of those settlements was against Law360, a legal news website that used non-compete agreements to restrict the employment options of nearly all employees, including entry-level news assistants. The use of non-competes was so pervasive at Law360 that an entry level news assistant lost a job offer from another new organization when the new employer learned of the agreement. Another recent settlement involved workers at counter-service sandwich shop Jimmy Johns, who were required to sign a non-compete that prevented them from seeking or taking employment with a competing sandwich shop located within three miles for two years after employment. This restriction prevented cashiers and sandwich-makers at the chain from finding any other similar employment in New York City, despite the fact that they had no trade secret or confidential job information. The New York Attorney General was able to obtain agreements from both employers in these circumstances to stop using non-compete agreements.

Schneiderman announced that he would pursue legislation to restrict non-competes in New York in 2017. The proposed legislation would:

• Prohibit the use of non-competes for any employee below the salary threshold set by Labor Law Section 190(7), which is currently $900 per week;
• Prohibit non-competes that are broader than needed to protect the employer’s trade secrets or confidential information;
• Require non-competes to be provided to employees before a job offer is extended;
• Require employers to pay employees additional consideration if they sign non-competes;
• Limits the time duration for non-competes; and,
• Creates a private right of action with liquidated damages for violations.

The proposed legislation has support among New York State Senators Diana J. Savino and Andrew Lanza and Assemblymembers Jeffrey Dinowitz and Pilliop G. Stack. Employers should limit their use of non-compete agreements to specific circumstances – when employees are exposed to valuable trade secret information or are working in areas that are unique to the business. Employers who rely on non-competes should review those agreements with an eye to their enforceability and should review them in light of this proposed legislation.