Federal opposition to non-compete agreements is mounting, as the National Labor Relations Board general counsel issued a memo this week stating that non-compete agreements violate the National Labor Relations Act and the number of states banning the agreements outright continues to grow.
The labor board memo comes five months after the Federal Trade Commission proposed a rule that would prohibit employers from using virtually all non-compete agreements. The FTC is expected to make a final decision on the rule next spring.
For HR leaders, a ban could create a time-consuming headache. The C-suite is likely to seek workarounds to protect sensitive data and information from leaving the company when executives bolt to competitors. In addition, if the ban is made retroactive, HR would need to notify not only existing but also former employees of the change.
As a result, such organizations as the HR Policy Association, a public policy organization whose members include chief human resource officers at Fortune 500 companies and other large employers, oppose efforts to ban non-compete agreements at both the federal and state levels.
Among HRPA’s nearly 400 members, approximately 75% of members use non-compete agreements for less than 10% of their overall workforce, says Ani Huang, CEO of HRPA’s Center on Executive Compensation.
“From a large company perspective, non-competes are applied to only the very senior people in the organization for whom there would be a big cost if they left and did the same exact job at a direct competitor,” Huang tells HRE.
On a state level, the Minnesota legislature passed a bill last month that bans all new non-compete agreements, a move that a few other states are considering, says Greg Hoff, associate counsel at the HR Policy Association. California, Oklahoma, North Dakota and the District of Columbia already ban non-compete agreements in all cases or most cases. Similarly, the FTC proposed rule would apply to virtually all cases.
But in other states, such as Maine, Maryland, New Hampshire, Rhode Island, and Washington, existing bans apply to only low-wage workers. As in these states, the memo from National Labor Relations Board general counsel Jennifer Abruzzo calls for largely keeping low-wage workers and non-managerial employees out of the loop of receiving non-compete agreements.
5 steps HR leaders can take now on non-compete agreements
1. Understand where and who your non-compete employees are.
“That’s work you can do right now,” Huang says, offering steps you can take to ascertain this information.
2. Be prepared to inform current and past employees of the non-compete change.
Current and former employees who are still under a non-compete clause may need to be informed they are no longer bound by it—should the FTC rule go through as currently proposed.
“It’s kind of like adding insult to injury,” Huang says. “If you’ve paid someone a substantial amount of severance and said in return for this you agree not to compete for a year, you may be responsible for contacting them and saying, ‘Hey, guess what? That agreement is now null and void.’ And there is no provision in the FTC’s rule that says you can ask for them to pay their severance money back.”
3. Consider reducing the number and type of non-compete agreements.
“If you have 10% to 20% of your employee population subjected to non-compete agreements, it might be wise to start thinking, ‘Which of those employees do I really need to do this with?’” Huang says. “Because I do think we’re going to see some sort of limitations on non-competes in the future.”
4. Think about limiting the scope of non-compete agreements.
Limit the language of your non-compete agreement to the exact protections you will need, Hoff advises. He notes that the National Labor Relations Board, in particular, is looking at how broad the language is in some non-compete agreements.
5. Look at the worst-case scenario for non-compete agreements.
Make use of the old adage of “hope for the best and plan for the worst.” Huang notes that it is wise to consider the worst-case scenarios involving the use of non-compete agreements and plan accordingly. She offers ideas for HR leaders to approach potential bans or limitations on non-compete agreements.
Challenges with retooling non-compete agreements
As HR leaders face the potential of losing access to non-compete agreements, they may turn an eye toward other types of restrictive covenants not under legal scrutiny. Those might include confidentiality agreements, non-disclosure agreements, and non-solicitation agreements of customers or employees agreements.
Don’t go there, advises Huang.
“I think that HR leaders are going to struggle with trying to figure out how to use other types of restrictive covenants to accomplish the same goal as a non-compete when they really aren’t designed to do the same thing.”
Currently, U.S. employers often use a “cooling off” approach when employees seek to join a competitor. Huang notes that they may want to consider adding a practice used in Europe called “garden leave.”
Under a garden leave, outgoing executives stay with their current employer for a designated time period but are prohibited from showing up to work or accessing company information. Although they remain on the payroll and continue to receive benefits, this leave allows their current knowledge to stale and grow irrelevant before joining a competitor. Essentially, the new employer could wait months for new employees, tending their proverbial gardens in the interim, to join the company.
With a similar “cooling off” period in the U.S., executives who join a direct competitor temporarily work in a different role for a designated period of time to allow their current knowledge to become stale before they move into a similar role that they held with their past employer.
But should non-compete clauses disappear as state and federal opposition mount, both workarounds will likely become obsolete.
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