In January 2019, Florida Senator Marco Rubio introduced the “Freedom to Compete Act” (the “Act”), which would limit an employer’s ability to enter into non-competition agreements with certain entry-level, low-wage employees. Additionally, the Act seeks to amend the Fair Labor Standards Act (FLSA) to void existing non-compete agreements — and outlaw any new non-compete agreements — between employers and employees classified as “non-exempt” under the FLSA. Employers who violate provisions of the Act “shall be liable for such legal or equitable relief as may be appropriate to effectuate the purposes of such section.”
Under the FLSA, “non-exempt” employees are generally employees paid on an hourly basis and must be paid minimum wage and time-and-a-half for overtime hours worked. “Exempt” workers, as defined under the FLSA, are “executive, administrative, professional and outside sales employees” who are paid salaries and therefore are exempt from the FLSA’s minimum wage and overtime pay requirements. Exempt workers are usually higher-skilled workers. By prohibiting employers from using non-compete agreements with non-exempt employees, the Act would enable lower-skilled employees to pursue better employment opportunities by allowing more freedom to move within their industry.
Employers use restrictive covenants as a means to protect trade secrets or specialized training. They are also used to prevent an employee from engaging in direct competition with the employer by using skills and knowledge gained during the employee’s tenure with the employer. Restrictive covenants generally have been used for high-ranking administrative, managerial or outside sales employees to prevent them from bringing confidential trade secrets or confidential information to competitors.
The Act broadly defines a “non-compete agreement” as 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.” The language of the Act expressly provides that the Act does not preclude agreements that prohibit the disclosure of trade secrets. However, even though the Act was written to void only non-compete agreements, the Act’s broad language could also likely void customer non-solicitation and non-disclosure agreements.
Interpretation of non-compete agreements varies widely from state to state. Indeed, federal legislation may be helpful in assisting states to interpret and enforce restrictive covenants in a more uniform manner. There have been multiple federal and state level legislative efforts to limit the use of non-competition agreements with respect to low wage or entry-level workers. However, the effects of the Act could have far-reaching implications for employers and employees.
The language of the Act imposes a broad prohibition on non-competition agreements for all employees. If the legislation is enacted, employers will be forced to determine what level of risk low-wage or entry-level employees will pose to disclosure of the employer’s trade secrets. Further, the Act is silent with regard to non-solicitation agreements, and the scope of the Act will need to be clarified as to whether non-solicitation agreements are included in this ban. Additionally, the Act could lead to increased litigation over whether an employee is correctly classified as “non-exempt,” causing increased time and expense in litigating a non-compete dispute. Lastly, by allowing non-compete agreements only for “exempt executive, administrative, professional, and outside sales employees,” it is arguable that the ban will extend to employees who are not “entry-level” or “low-wage.”
We will continue to monitor this legislation for additional developments. Employers are encouraged to review existing non-compete agreements for enforceability. Employers should also ensure such agreements are narrowly tailored to protect the employer’s specific interests.
Jeff Mokotoff is Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group. If you have any questions regarding this decision, please feel free to contact Jeff at jmokotoff@fordharrison.com, or the co-author of this Alert, Jenna Goldman at jgoldman@fordharrison.com, an associate in our Hartford office. You may also contact the FordHarrison attorney with whom you usually work.