Requiring new employees to sign non-compete agreements has been standard practice for decades, and non-compete restrictions have been established to follow. By signing a non-compete agreement, employees agree not to conduct business that acts as direct competition to their employer within a specific geographic region. The agreement is enforceable throughout the duration of the worker’s employment and for a specified period of time after resignation.
Employees who sign a non-compete clause agree not to compete with their employer as an independent contractor, significant investor, full owner, or part-owner of a business. In 2019, the Economic Policy Institute (EPI) reported that nearly one-third of private businesses in the United States required new employees to sign a non-compete agreement. This statistic includes people in all employment levels from entry-level to executive.
Non-Compete Restrictions Moving from State to Federal Regulation
Prior to this year, each state enforced its own regulations around non-compete agreements. For example, Oklahoma, North Dakota, and California outright ban the agreements, and Washington, D.C. will soon follow suit. The following states ban non-compete agreements only for low-wage earners:
- New Hampshire
- Rhode Island
Three additional states have pending legislation to join the seven states listed above. These states are Illinois, Nevada, and Oregon.
Federal Proposal Aims to Remove Employment Barriers for People Affected by COVID-19
When non-compete agreements first became popular, employers stated that they needed them to prevent employees from publicizing their trade secrets. The tide began shifting towards employees when millions of people lost their job due to migration efforts associated with the coronavirus pandemic. As many laid-off workers have successfully argued, signing a non-compete agreement with their employer has significantly hampered their ability to find new work after a COVID-19 layoff.
When President Joe Biden was campaigning in 2019 and 2020, he vowed to do away with non-compete agreements altogether. He stated that the only exception would be when such an agreement was necessary to protect trade secrets.
Biden recently signed an executive order on the matter. The order directed the Federal Trade Commission (FTC) to enforce a unilateral ban on the practice or at least severely limit it, except when related to trade secrets.
Employers Should Review How They Handle Non-Compete Agreements
Business watchdog groups predict that it will be several years before these changes go through if they become law at all. In the meantime, employers that require new employees to sign the agreements should evaluate whether it still makes sense to do so. If so, they must ensure that their current non-compete agreements follow all applicable state laws.
Palmetto Payroll understands that evaluating and changing legal documents that have been in force for years can be challenging. We invite business owners in the Charleston, South Carolina area to request a consultation with our company to learn more about how we can help with accounting and finances for small business owners.