The Obama administration is continuing its crusade against “misused” non-compete agreements.
The White House issued a call to action Tuesday, asking state legislatures to consider reforms “to reduce the prevalence of non-compete agreements that are hurting workers and regional economies.”
The White House is asking state lawmakers to consider one or more of the following recommendations from today’s statement:
1. Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
2. Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
3. Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
Tuesday’s announcement is part of the administration’s ongoing effort to curb non-compete agreements in the U.S. In May, The White House and Treasury conducted reports to study the issue and found that only 24 percent of workers and fewer than half the workers with non-competes say they know trade secrets.
The report also revealed 15 percent of workers without a four-year college degree and 14 percent of workers earning less than $40,000 per year have non-competes. The prevalence of non-competes among lower-skilled employees shoots holes in the claim that the agreements are intended to protect trade secrets, the Obama administration says.
“While the current comments address only the problem of low-wage/low-skill workers, they call attention to the unfair and anti-labor nature of non-competes generally, making it harder for their defenders to dismiss the growing storm of criticism over these agreements,” said Seattle investor and former Techstars director Chris DeVore.
DeVore got into a heated debate with WTIA CEO Michael Schutzler over non-competes in February, illustrating just how contentious the issue is in the tech world.
“I’ve surveyed more than 100 companies on this topic since DeVore started making noise about it this summer,” said Schutzler at the time. “Most of the companies are small, some larger, and yes I’ve heard out Microsoft and Amazon as well,” he said. “There is nearly perfect alignment on the need to protect IP with non-competes and WA state has reasonable and rational rules.”
The dispute was related to a stalled bill that would have banned non-competes in Washington state. The bill will be considered again in 2017.
“Non-competes can and do serve the valid purpose of protecting companies’ proprietary information and trade secrets,” said attorney Frank Paganelli, who serves as chair of Lane Powell’s Startups and Emerging Companies Practice Group. “That said, over the years their use has become nearly ubiquitous, their reach overbroad, and the benefits offset by the resulting limitations on free entrepreneurship.”
Courts tend to limit the enforceability when legal action is taken over non-compete agreements, a trend Paganelli says makes sense. To accompany today’s best practices announcement, the White House issued a state-by-state report detailing the enforceability of non-competes and providing other relevant information for workers.
“Though each state faces different circumstances, we believe that employers have more targeted means to protect their interests, that non-compete agreements should be the exception rather than the rule, and that there is gross overuse of non-compete clauses today,” the White House said Tuesday.