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Washington takes a closer look at noncompetes

Noncompete agreements are a divisive topic, with opinions often differing between business owners and employees. Employers argue that these contracts protect intellectual property and trade secrets, while opponents argue that they limit job growth and opportunity. We previously discussed some pros and cons last year.

Noncompetes are legal in New York, with strict stipulations, but some states have banned them outright. Now they are drawing additional scrutiny from the president and Federal Trade Commission in a new executive order.

Who is using noncompete agreements?

A 2019 report found that up to one-half of private-sector businesses utilize noncompetes with their staff. It is typically more common among high-wage earners, but not exclusively so.

After all, New York led the charge against Jimmy John’s sandwich shops in 2016. In that case, the agreements limited low-wage earners such as sandwich makers and delivery drivers. While people generally expect noncompete agreements in high-wage positions that work closely with trade secrets, the previously mentioned report specifically notes the prevalence of noncompete agreements in lower-income industries such as construction, manufacturing and retail.

Is it a state or federal issue?

At present, states determine the rules for this type of employment contract. New York’s demands that an agreement is “reasonable,” largely meaning that it cannot put undue hardship on the employee.

Some states, such as California, have banned the practice completely. For the most part, the federal government has left the matter to states, which makes the recent involvement of the FTC unusual and legally dubious. There are questions about how much control the federal commission has over the matter.

What comes next?

As with any administration change, coupled with the irregularities of an economy amid a global pandemic, the situation is highly complex and subject to change quickly, whether by executive or judicial review. Some employers continue to use noncompete agreements in states that have banned them, which raises further questions about enforcement.

With increased attention on noncompete clauses, it is essential for any business to carefully consider its options with new hires and departing employees. Noncompete agreements can be notoriously difficult to enforce under New York law. As with any legal contract, the best protection is to ensure its validity before the contract is signed rather than via litigation after the fact.