Non-compete agreements viewed with hostility by federal agencies

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On July 9, 2021, President Biden issued an Executive Order (EO)1 instruct the Treasury Department, in conjunction with the Department of Justice (DOJ), Department of Labor (DOL), and Federal Trade Commission, to “promote competition” in the U.S. labor market. In response, the Treasury Department recently released a report titled The State of the Labor Market (Treasury Report) on March 7, 2022. Employers should note that the EO and Treasury Report reflect a significant change in the post-employment legal landscape. non-competition agreements. This alert provides an analysis of the cash report.

Additionally, please join the K&L Gates Global Employer Solutions webinar on March 30, 2022. The webinar will cover the latest developments regarding non-compete agreements, including the Treasury report, and strategies for retaining key employees in the United States. USA, UK and Australia.2

THE TREASURY REPORT

In addition to providing an introduction to labor economics, the Treasury report analyzes the current labor market landscape and draws on decades of economic research to identify employment practices that are believed to restrict competition. The Treasury report concludes with a bill to promote competition, prevent antitrust activity and increase employee bargaining power.

Three days after the release of the Treasury report, the antitrust division of the DOJ and DOL issued a memorandum of understanding (joint brief). The joint memo highlights the interests of the DOL and DOJ in preventing anti-competitive behavior that harms American workers, including “collusive behavior” and “business models designed to escape legal liability.” To further this common goal, the DOL and DOJ intend to share information, train agency personnel on abusive employment practices, and create a coordinated enforcement program.

POTENTIAL IMPACTS

Importantly, none of these agency documents are legally binding and employers are not required to change their current approach to covenants to conform to agency views. However, these reports reflect a legal landscape that is becoming increasingly hostile to post-employment non-compete agreements.3 Over the past year, the DOJ has filed criminal charges against companies that allegedly violated antitrust laws with their anti-poaching and wage-fixing noncompete agreements. Meanwhile, a growing number of states are passing laws to govern the nature, scope, and character of permitted non-competition agreements, while including unprecedented penalties and enforcement provisions.4

For example, the Washington DC law that effectively prohibits most non-compete agreements with employees is set to go into effect October 1, 2022.5 Penalties for violations range from $500 to $3,000 per affected employee, depending on the violation, and employers may also be subject to penalties from the DC Mayor and Attorney General ranging from $350 to $1,000. USD per violation.6 In Illinois, the state attorney general can now impose a civil penalty on employers who violate the Illinois Freedom to Work Act of $5,000 per violation or $10,000 for each repeated violation on a 5 year period.7 California, where non-competition agreements are prohibited, now subjects employers to civil liability of up to $5,000 for each employment contract entered into that contains a non-competition clause intended to be enforced in California.8 And as of March 1, 2022, a violation of Colorado’s non-competition law is a class 2 criminal offense.9

In light of this evolving landscape and in the absence of federal non-competition legislation setting a uniform national standard, employers who require their employees to sign restrictive covenant agreements must continually assess their compliance with state laws. . At a minimum, restrictive agreements should not be broader than necessary to protect the business interests of the organization, and employers should not rely on the courts to modify overbroad provisions. Additionally, where the use of a non-competition agreement or other restrictive covenants is restricted in whole or in part by state law, employers should consider reinforcing workplace policies that deal with confidentiality and non-interference to protect trade secrets and proprietary information.

For more information on the applicability of non-competition agreements and other covenants in this ever-changing environment, please contact a member of the K&L Gates Labor, Employment and Workplace Safety (LEWS) team and please join the K&L Gates Global Employer Solutions webinar on March 30, 2022.

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