Understanding Recent Federal Law Changes Regarding Non-Compete Provisions
Non-compete provisions have long been a subject of debate and scrutiny among lawmakers. Although their purpose is simply to prevent employees from unfairly using information gained during their employment from competing against their employer, they are often criticized for stifling innovation, discouraging fair competition, and chilling federally protected activities. Several states prohibit non-competes for these reasons. Increasingly, there has also been movement on the federal scene that indicates that non-competes may be banned across the country as early as 2024. Because of this rapidly evolving legal landscape, employers must stay abreast of the current laws and regulations and take appropriate action to avoid penalties and be sure to protect their interest through the legal means available.
Non-Compete Agreements in North Carolina.
In North Carolina, non-compete agreements have historically been enforceable, provided they meet the following criteria:
- Legitimate Business Interest. The provision protects a legitimate business interest, such as trade secrets, customer relationships, or specialized training.
- Reasonableness. The scope, duration, and geographic restrictions of the non-compete are reasonable and necessary to protect the legitimate business interest. In North Carolina, there is no bright line rule regarding these standards. However, case law has established that typically a 2-year non-compete will be an enforceable timeline and barring the employee from performing the services he or she performed for the employer for the employer’s competitor is typically an enforceable scope. Conversely, barring the employee from performing any services for a competitor is typically not an enforceable scope.
- Consideration. The employer provides the employee some form of consideration (such as a job offer, promotion, or salary increase) in exchange for agreeing to the non-compete.
Currently, most non-compete agreements will be enforced in North Carolina if they meet these requirements.
Recent Developments: NLRB Memo and FTC Ruling.
As expressed above, there have been significant federal developments regarding non-competes. These notably include a National Labor Relations Board (NLRB) Memo published on May 30, 2023, and a Federal Trade Commission (FTC) proposed ruled released on January 5, 2023.
- NLRB Memo. The NLRB is a federal agency tasked with protecting employees’ rights. On May 30 2023, its General Counsel clarified the agency’s stance on non-compete agreements and its compliance with labor law set forth in the National Laor Relations Act (NLRA). The memo explains that overbroad non-compete agreements are unlawful because they discourage employees from exercising their rights under Section 7 of the NLRA. Specifically, the board found that these agreements interfere with employees’ ability to: 1) concertedly threaten to resign in order to secure better working conditions; 2) carry out such threats to resign; 3) concertedly seek employment with a local competitor in search of better working conditions; 4) encourage co-workers to work for a local competitor to jointly secure better working conditions; and finally 5) seek employment, at least in part, to specifically engage in protected activity, including union organizing, with other workers at an employer’s workplace. Notably, the memo provides that noncompete agreements could be permissible for certain managerial, ownership, and key-employee positions or true independent-contractor relationships.
- FTC Proposed Rule. In March 2021, the FTC ruled that non-compete agreements are subject to federal antitrust law and that enforcing them could be viewed as anticompetitive behavior. This was part of a growing trend of scrutiny from federal regulators. On January 5 of this year, finding that non-competes constituted an unfair method of competition in violation of Section 5of the Federal Trade Commission Act, the FTC officially proposed a new regulation that would ban employers from imposing non-competes on their workers. The FTC is expected to vote on this rule in April of 2024.
Impact on Businesses
These likely law changes will have a significant impact on North Carolina businesses, and all businesses should take care to prepare for them. These steps include:
- Carefully assessing the necessity and enforceability of non-compete provisions in specific contracts rather than including non-compete provisions as a standard term in all their contracts.
- Considering alternative protections available instead of non-competes. In cases where non-compete agreements may become more challenging to enforce, businesses should explore alternative means such as confidentiality agreements, trade secret protection, and non-solicitation agreements. A well drafted non-solicitation provision can often achieve an employer’s goals while allowing a departing employee the ability to obtain alternative employment. That being said, companies should consult with counsel in pursuing these options as the FTC has already indicated that it will closely scrutinize any restrictive provision—regardless of the name—if it tends to have the same practical impact as a non-compete.
- Ensuring that their human resources and legal teams are educated on the latest developments in non-compete law to avoid inadvertently drafting agreements that run afoul of changing regulations and open the company up to penalties and litigation for violations.
As your businesses navigate this evolving landscape and seek to strike a balance between protecting its legitimate business interests and complying with the changing legal framework, the attorneys at Skufca Law are here to help. Contact the business law attorneys at Skufca Law at (704) 376-3030.