Attempts to Curtail Restrictive Covenants Are Not Slowing Down: Recent Legislative Efforts to Curtail Restrictive Covenants

During the past two years, there has been an explosion in legislative efforts at the state level to curtail the use of non-compete agreements. See prior newsletters and articles (July 2021, July 2020, and January 2020). This push for limitations on the use of non-compete agreements is unlikely to slow down anytime soon, as 2022 sees the enactment of new state laws in Colorado, Washington and New York, as well as pending federal legislation.

2022 State Laws

Colorado: Violations of Non-Compete Law to Become a Criminal Offense. Colorado already prohibits non-compete agreements with employees, except in four limited circumstances: (1) a contract for the purchase and sale of a business or the assets of a business; (2) a contract for the protection of trade secrets; (3) a contractual provision providing for recovery of the expense of educating and training an employee who was employed by the employer for less than two years; or (4) agreements entered into with executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. Effective March 1, 2022, employers who fail to adhere to the limitations placed on non-compete agreements under Colorado law may be charged with a class 2 misdemeanor criminal offense punishable by up to 120 days in jail and/or a fine up to $750. The new law (Colorado SB 21-271) does not impact the general enforceability of non-compete agreements in Colorado, but underscores the significance Colorado places on protecting employees against unlawful attempts to thwart Colorado’s public policy against non-compete agreements.

Washington: Increases in the “Earnings Threshold Amounts” for Low-Wage Earners. Beginning in 2019, Washington prohibited non-compete agreements with employees and independent contractors whose earnings fell below certain thresholds to protect certain low-wage earners against unfair restraints on their ability to obtain employment. As of January 1, 2022, the earnings threshold amounts for employees and independent contractors increased, respectively, from $101,390 to $107,301.04 and from $253,475 to $268,252.59.

New York: Potential Future Ban for Employees Making Below the Median Wage. In 2021, several bills were proposed that would restrict or wholly prohibit non-compete agreements in the context of employment. None of the bills gained traction, with the most restrictive stalling in the State Senate Labor Committee in April 2021. During her first State of the State address on January 5, 2022, however, Governor Kathy Hochul pledged to ban non-compete agreements for New York employees making below the median wage in the state. Thus, New York remains a state to watch for future limits on the use of non-compete agreements.

Recent Federal Efforts

The past year has seen numerous attempts to reduce or eliminate non-compete agreements at the federal level. Though no attempt at federal action has yet been successful, worker mobility is clearly at the forefront of federal lawmakers’ minds.

As we previously alerted you, on July 9, 2021, President Biden issued an executive order that, among other things, encouraged the Federal Trade Commission (FTC) to ban or limit non-compete agreements. Although the FTC has not yet taken any concrete action to limit non-compete agreements or other restrictive covenants, the FTC has begun taking steps to comply with President Biden’s order, including:

• In November 2021, the FTC released its draft Strategic Plan for Fiscal Years 2022-2026 for public comment. Among the FTC’s objectives is to “identify, investigate, and take actions against anticompetitive mergers and practices,” which actions include “restricting the use of non-compete provisions.”
• On December 6-7, 2021, the FTC and the Department of Justice (DOJ) jointly hosted a virtual public workshop titled “Making Competition Work: Promoting Competition in Labor Markets.” This workshop brought together lawyers, economists, academics, policy experts, labor groups, and workers to explore recent developments in antitrust and labor, as well as implications for efforts to protect and empower workers through competition enforcement and rulemaking.
• Following the workshop, the FTC and DOJ invited public comment, receiving 39 submissions.

The federal legislature got into the action as well. Though none were successfully passed, a myriad of bills aimed at banning non-compete agreements with certain workers and/or in certain situations were introduced during 2021:

Workforce Mobility Act of 2021: Introduced in the Senate as S. 483 and in the House of Representatives as H.R. 1367 on February 25, 2021, the proposed Workforce Mobility Act would, among other things, limit the use of non-compete agreements to situations involving the sale of a business or the dissolution of a partnership and create a private cause of action for aggrieved workers. The proposed bills were each referred to committee in February 2021, but neither appears to have gained any traction.

Freedom to Compete Act: On July 15, 2021, the bipartisan Freedom to Compete Act, S. 2375, was introduced. The proposed law would amend the Fair Labor Standards Act to ban non-compete agreements for non-exempt workers. Interestingly, the law, if passed, would apply retroactively to existing non-compete agreements. The bill was referred to the Committee on Health, Education, Labor, and Pensions, but appears to have stalled there.

Employment Freedom for All Act: On November 3, 2021, Rep. Claudia Tenney (R-NY) introduced the Employment Freedom for All Act, H.R. 5851, which would void existing non-compete agreements for employees fired for refusing to comply with an employer’s COVID-19 vaccine mandate. The bill was referred to the Committee on Education and Labor and to the Committee on Energy and Commerce, but has not yet left either committee.

Legislative changes and executive pressure in 2021 and early 2022 make one thing very clear: non-compete agreements are subject to continued and increasing scrutiny. We will continue to monitor this ever-changing area of the law.