Despite growing national attention and even certain state legislative action, many states continue to allow employers to widely use non-compete agreements that restrict an employee from competing against the employer’s business. These restrictive covenants generally must be reasonable in scope and specifically designed to protect an employer’s legitimate business interests to be enforceable. Employers can find themselves in hot water if they try and impose overly-broad or unduly aggressive restriction that arbitrarily restrict an employee’s activities. Virginia tends to disfavor these sorts of restraints on trade, and there is proposed federal legislation to could further curtail non-competes if passed.
On January 15, 2019 Senator Mark Rubio introduced in the Senate the “Freedom to Compete Act” (the “Act”), which is a pending amendment to the Fair Labor Standards Act of 1938 (“FLSA”). The Act would prohibit employers from using non-compete agreements with employees who are considered non-exempt under the FLSA. Not only would new agreements be void for non-exempt employees, the Act would also retroactively void non-compete agreements that were entered, extended, or renewed before the enactment with these select employees. This Act would not apply to those who are considered exempt employees, and not subject to minimum wage and overtime compensation described in section 13(a)(1) of FLSA, which are generally higher-level executives, professionals, and administrators.
The Act aims to “empower” lower-level employees, who are typically entry-level (non-managerial), unskilled, or blue-collar workers, in their pursuit for better employment opportunities. Opponents of the Act criticize that nothing is done for mid- and high-level workers. They argue that managerial employees may not always be high-ranking officers in large companies but could include store managers. It’s also unclear whether the Act would void other restrictive covenants such as non-hiring of employees or non-solicitation of customers provisions. Nevertheless, the target group of the Act is for more vulnerable employees who likely have no access to actual trade secrets or a basis to solicit customers that would harm with their former employer due to their lower-level employment. The Act also specifically addresses its construction as precluding employers entering an agreement regarding confidential information, such as trade secrets, as well.
As of the dating of this entry, the Act (S.124) has been read twice in the Senate and referred to the Committee on Health, Education, Labor, and Pensions. Employers nationwide should take note of this particular Act and whether it becomes law. If passed, it would likely call for employers to amend existing employment agreements, particularly non-exempt employees, that contain typical restrictive covenants that were once thought to apply to all employees.
Nick Johnson is a Partner at Berenzweig Leonard, LLP. He can be reached at njohnsonj@berenzweiglaw.com.
Law Clerk Hyun-Jung Oh is a second-year law student at George Mason University School of Law.