White House Calls on States to Limit the Scope of Non-Compete Agreements

arm wrestlingThe American economy is largely based on the principle that competition is beneficial to everyone. No system of laws is ever perfect, of course, and ours requires regular revisions to balance different interests, such as an employer’s interest in retaining its investment in an employee and an employee’s interest in choosing where—and in which field—to work. Non-compete agreements (NCAs) limit an individual’s ability, upon ceasing to work for an employer, to work in a similar job. This obviously protects the employer’s interest but can be quite damaging to the former employee. Several states have outlawed NCAs entirely, while most states, including New Jersey, have established strict criteria for their enforcement. The White House issued a call to state governments in October 2016 to restrict the enforceability of NCAs even further, in ways that benefit employees.

Laws governing the enforceability of NCAs differ considerably from state to state. Some states have enacted legislation, while others rely on court rulings based on statutory or common law. In a very general sense, NCAs prohibit an employee from working for a competitor or starting a competing business while working for the employer or after their employment ends. An open-ended NCA is almost universally unenforceable, but many states allow NCAs that are limited in time and geographic scope. For example, an NCA that bars a former employee from working for a competitor within 20 miles of the employer’s location, for a period of six months after the end of their employment, is likely to be enforceable in most jurisdictions.

At least four states, California, Hawaii, North Dakota, and Oklahoma, have banned the use of NCAs in employment contracts almost entirely. Under New Jersey law, NCAs are only enforceable if they meet a three-prong test called the Solari/Whitmyer test. The NCA must be “necessary to protect the employer’s legitimate interests,” it cannot create an “undue hardship” for the employee, and it cannot be “injurious to the public.” Community Hosp. Group, Inc. v. More, 869 A.2d 884, 897 (N.J. 2005); citing Solari Industry v. Malady, 264 A.2d 53, 56 (N.J. 1970); and Whitmyer Bros., Inc. v. Doyle, 274 A.2d 577 (N.J. 1971).

In April 2016, the White House issued an executive order (EO) entitled “Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy.” E.O. 13725 (Apr. 15, 2016), 81 Fed. Reg. 23417 (Apr. 20, 2016). The EO sets several general policy priorities regarding the encouragement of competition, and it directs executive departments and agencies to identify ways they can promote these policies through rulemaking, enforcement, and referrals to other agencies. The White House’s call to state governments followed several months after the EO.

The White House estimates that 20 percent of U.S. employees are subject to NCAs, and it reports that “there is substantial evidence of overuse and misuse of these clauses.” Its call to action, which is simply a request to state governments with no legal force, recommends three “best practices” for states:  (1) outright bans on NCAs for workers in certain fields, low-wage workers, and workers who have been laid off; (2) measures to promote “transparency and fairness” in NCAs, such as requiring separate consideration; and (3) a “red pencil doctrine,” by which an invalid portion of an NCA renders the entire NCA unenforceable.

If you need to speak to an employment lawyer in New Jersey or New York, contact the Resnick Law Group online, at 973-781-1204, or at 646-867-7997.

More Blog Posts:

Non-Competition Agreements Under New Jersey Law, The New Jersey Employment Law Firm Blog, November 20, 2015

Updated LinkedIn Profile Leads to Claim for Alleged Breach of Non-Compete Agreement, The New Jersey Employment Law Firm Blog, February 27, 2015

Sandwich Chain Reportedly Requiring Employees to Sign Non-Competition Agreements, The New Jersey Employment Law Firm Blog, November 12, 2014

Photo credit: Peggy_Marco [Public domain], via Pixabay.

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