Last year, Democrats in the United States Senate and House of Representatives introduced bills — S.2782  and H.R.5631 — banning non-compete agreements in the vast majority of workplaces across the country. Although those bills failed to gain traction, the authors of this Blog anticipated a renewed effort at federal non-compete reform in 2019, with Democrats taking control of the House in the November 2018 elections. Sure enough, the Federal Freedom to Compete Act  (the “Act”) was introduced on January 15, 2019, but in a twist, the Act’s author is not a Democrat but rather Marco Rubio, Republican Senator from the State of Florida.

As explained on Senator Rubio’s website, the Act is focused on “entry-level, low-wage workers” and is designed to “empower these workers by preventing employers from using non-compete agreements in employment contracts.” Below, we take a closer look at the Act, including the types of agreements covered by the Act, as well as the scope of employees who would be subject to its protections.

Introduction

Drafted within the framework of the Fair Labor Standards Act (“FLSA”), the Act prohibits employers from entering into, extending, renewing, enforcing, or threatening to enforce “non-compete agreements” with respect to all employees except for FLSA-exempt executive, administrative, professional, or outside sales employees. Notably, this prohibition would apply retroactively to any agreements entered into prior to the Act’s enactment. Employers who violate such provisions “shall be liable for such legal or equitable relief as may be appropriate to effectuate the purposes of such section.”

What is a “non-compete agreement”?

As defined in the Act, a “non-compete agreement” means an agreement between an employer and employee “that restricts such employee from performing, after the employment relationship […] terminates …: (1) Any work for another employer for a specified period of time[;] (2) Any work in a specified geographical area[; or] (3) Any work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.” In addition to this general definition, the Act expressly states that it does not preclude agreements that prohibit the disclosure of trade secrets.

We see three primary issues with this definition:

First, while it is true that most non-competes are limited to a specified duration, geographic range, and type of work, that is not always the case. Interpreted in its most literal sense, the Act does not account for restraints on competition that, intentionally or not, fail to include such specifications. For instance, an agreement that simply prohibits an employee from subsequently working for a competing business, while potentially overbroad and unenforceable on other grounds, would fall outside of the above-referenced definition and, therefore, would theoretically avoid coverage under the Act. The creation of this loophole was presumably unintentional.

Second, by defining “non-compete agreements” to include agreements that restrict work “for another employer” for a specified duration or in a specified capacity, the Act seemingly fails to cover agreements that prevent an employee from competing in a capacity other than as an employee (e.g., where an employee forms a competing business or works for a competitor as an independent contractor). Again, this distinction was presumably unintentional.

Third, while the Act expressly disclaims coverage over agreements that prohibit the misappropriation of trade secrets, it is unclear whether it applies to the use of limited restraints on competition, such as covenants that prohibit the solicitation of employees, the solicitation of customers, or the disclosure of confidential information that does not qualify as a trade secret.

Who does the Act protect?

As mentioned above, the primary intent of the Act is to increase the economic freedom of “entry-level, low-wage workers.” In order to meet that goal, the Act initially imposes a broad prohibition on non-compete agreements for all employees. The Act then adds the caveat that the prohibition “shall not apply with respect to any employee described in [FLSA] section 13(a)(1)[,]” which includes exempt executive, administrative, professional, and outside sales employees who meet heightened wage requirements.

By allowing non-compete agreements only for exempt executive, administrative, professional, and outside sales employees, one could safely argue that the Act’s non-compete ban extends to employees who are neither “entry-level” nor “low-wage.” At the same time, the Act would prohibit the use of non-compete agreements with anyone who is paid on an hourly basis. Consequently, as the Act gets increased attention, there will likely be efforts from pro-business forces to narrow the scope of the ban.

Conclusion

In light of last year’s Democrat-led efforts to regulate non-compete agreements at the federal level, Senator Rubio’s submission of the Federal Freedom to Compete Act suggests a level of bipartisan support that was not previously apparent. We will continue to monitor the Act to determine the extent of that support. Employers with questions about the enforceability of their restrictive covenants are encouraged to contact a member of Jackson Lewis’s Non-Competes and Protection Against Unfair Competition Practice Group.

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Photo of Clifford R. Atlas Clifford R. Atlas

Clifford Atlas is a Principal in the New York City, New York, office of Jackson Lewis P.C. He is the Co-Leader of the Non-Competes and Protection Against Unfair Competition Practice Group.

Mr. Atlas works extensively with clients in developing and drafting employment contracts and restrictive covenant agreements, and developing programs to best protect clients’ confidential business information. He has significant experience in prosecuting as well as defending actions involving breach of non-competition and non-solicitation agreements, employee raiding, misappropriation of confidential information, tortious interference with contract, unfair competition, and related business claims. Mr. Atlas also has assisted clients in employment issues arising from corporate transactions.

Additionally, Mr. Atlas handles all types of employment discrimination, harassment, disability, wrongful discharge, and related employment tort, contract, wage-hour and employee benefits claims. He has tried cases in state and federal courts, and before administrative agencies. Mr. Atlas has argued numerous appeals to the United States Court of Appeals for the Second Circuit.

Mr. Atlas joined Jackson Lewis in 1985.

Photo of Erik J. Winton Erik J. Winton

Erik J. Winton is a Principal in the Boston, Massachusetts, office of Jackson Lewis P.C. He is the Co-Leader of the firm’s Non-Competes and Protection Against Unfair Competition practice group. His practice focuses on restrictive covenant drafting, counseling, litigation avoidance and litigation. He regularly provides valuable counsel to clients in New England and across the country regarding these issues.

Mr. Winton has extensive experience as a litigator, including successful first chair jury trial experience. He represents employers in federal and state courts and administrative agencies in matters involving discrimination claims based on race, sex, sexual preference, national origin, and disability; retaliation, whistle blowing, wage/hour claims and Department of Labor complaints; allegations of wrongful discharge and breach of contract under the common law; and claims for tortuous injury, such as defamation, infliction of emotional distress and interference with advantageous relations. Mr. Winton has prevailed on the vast majority of dispositive motions filed on his clients’ behalf, including several reported cases.

Mr. Winton’s practice emphasizes advising employers regarding how to comply with the full range of federal and state labor and employment laws. This includes advising clients on issues relating to disability and leave management, reductions in force, wage and hour laws and workplace safety. Mr. Winton also drafts and negotiates executive employment and severance agreements on behalf of both employers and executives.

Mr. Winton speaks frequently regarding employment law issues. He joined the firm in 2000 after five years as a litigator at Fitzhugh & Associates (now Fitzhugh & Mariani, LLP), a litigation boutique with offices in Boston and Hartford, Connecticut. While attending law school, he was on the staff of the Cardozo Arts & Entertainment Law Journal.

Photo of Colin A. Thakkar Colin A. Thakkar

Colin Thakkar is the Knowledge Management (“KM”) Attorney for Jackson Lewis P.C.’s Non-Competes and Protection Against Unfair Competition Practice Group, and is based in the Jacksonville, Florida, office.

In his role, Mr. Thakkar serves as a subject-matter expert on restrictive covenant agreements and unfair competition litigation; creates and manages legal and electronic resources and materials to provide innovative client services; serves as a resource for other practice group members; monitors and analyzes regulatory and case law developments; and contributes to the firm’s blogs and legal updates.

Since 2005, Mr. Thakkar has represented and counseled employers nationwide with regard to federal, state, and local employment laws. In addition to representing companies in non-compete, non-solicitation, and other unfair competition lawsuits, he has defended employers against claims alleging discrimination, unpaid wages, ERISA violations, and other employment-related matters. Mr. Thakkar also has significant experience representing and advising employers regarding traditional labor law issues, including labor arbitrations, unfair labor practice charges, and the interpretation of collective bargaining agreements.