Employment non-compete agreements, long considered a common tool for protecting employers’ interests, are facing increased scrutiny from both federal and state authorities. Recent actions by the Federal Trade Commission (“FTC”), the National Labor Relations Board (“NLRB”), and the state of Minnesota have ignited a broader debate surrounding the impact and enforceability of these restrictive covenants which has caused many employers utilizing them to stir in worry.

The FTC, an agency entrusted with protecting consumers and promoting competition, has recently expressed concerns about the potential anticompetitive effects of overly broad non-compete agreements. In early January 2023, it proposed a new rule that would ban employers from having employees agree to non-compete agreements as they would be deemed as unfair methods of competition if the proposed rule were to go into effect.  The proposed rule would make it illegal for an employer to enter or attempt to enter into a non-compete agreement with an employee, maintain any existing non-compete, or represent that an employee is bound by a non-compete. However, the proposed rule would not generally apply to other employment restrictions such as non-disclosure agreements. The comment period for this proposed rule has since closed and employers are anxiously awaiting a final ruling in the coming months.

Meanwhile, the NLRB’s General Counsel, responsible for enforcing federal labor laws, has taken steps to challenge overly broad non-compete agreements on grounds that they infringe upon lower wage, non-managerial employees’ rights to bargain collectively and engage in concerted activity for mutual aid and protection, which is protected under the National Labor Relations Act (“NLRA”). The General Counsel further stated in her public memorandum to all   regional directors that certain non-competes can unlawfully restrict employees’ ability to seek better job opportunities, collectively bargain, or advocate for improved working conditions, thereby violating Sections 7 and 8 of the NLRA. The memorandum specifically lists that overly broad non-competes interfere with an employee’s opportunity and ability to concertedly threaten to resign to demand better working conditions, from concertedly seeking or accepting employment with a local competitor to obtain better working conditions, and they prevent employees from seeking employment to specifically engage in protected activity.

Within the memorandum, it is stated that a business’s interest in “retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision because U.S. law generally protects employee mobility.” However, this does not mean there are no actions that employers can take as it is then stated that employers could offer longevity bonuses and utilize other narrowly tailored workplace agreements to protect proprietary or trade secret information. Additionally, the General Counsel states that employment non-compete agreements would not be prosecuted by the NLRB if they were to “clearly restrict managerial interests or ownership in a competing business, or true independent contractor relationships.” It is important to note that this memorandum issued by the General Counsel is not a ruling of law, but rather instructions to regional prosecutors on how to enforce the NLRA.

Minnesota Enacts a Near Total Ban

At the state level, the State of Minnesota has been at the forefront of the movement to curb non-compete agreements. On May 24, 2023, Minnesota Governor Tim Walz signed into law a bill that bans almost all employment non-compete agreements in the State of Minnesota. This ban will take effect on July 1, 2023, but it will not apply retroactively. Through the passing of this law, Minnesota joins just three other states in a near-total ban on employment non-compete agreements with only narrow exceptions. The new law will ban all agreements between an employer and an employee that restrict the employee, after their employment ends, from working for a different employer within a specified time period, working in a given geographical area, or working for a different employer in a similar capacity. This ban is also effective against independent contractors. Covenants not to compete, however, do not include non-disclosure agreements, confidential or trade secret agreements, employee or customer non-solicitation agreements, or the ability to use prior client or contacts lists. Additionally, covenants not to compete agreed to during the sale of a business or in anticipation of the dissolution of a business are still valid.

Adjusting for Minnesota Employees

Unlike the non-compete bans of some other states, Minnesota’s ban does not establish any income threshold that would allow for enforceability above a certain income level. The law also strives to eliminate workaround opportunities by prohibiting an employer from having an employee, who primarily lives and works in Minnesota, agree to either a choice of venue or choice of law clause. Further, the law allows employees who are enforcing their rights under this new law to receive attorney’s fees. It is important to note again that this law does not apply retroactively, meaning, the new law will only be applied to agreements that occur on or after July 1, 2023. Additionally, unenforceable non-compete agreements—formed after the new law takes effect—will not affect the enforceability of the rest of the contract.

The ban on non-compete agreements should lead to operational adjustments for Minnesota employers. HR policies and employment contracts will need to be reviewed and potentially revised to comply with the new legislation. Employers may need to implement enhanced confidentiality and trade secret protection measures, bolstering their internal processes and security protocols. Additionally, employers should consider revisiting their non-solicitation agreements and other restrictive covenants to ensure they remain legally enforceable within the bounds of the law.

As the debate continues to unfold, businesses and employees alike must stay informed about the evolving landscape surrounding non-compete agreements. It is crucial for employers to review and reassess their existing non-competes to ensure compliance with applicable laws and regulations. As businesses change in a competitive marketplace, employers increasingly rely on non-compete agreements to protect their intellectual property, confidential information, and trade secrets. Traditionally, non-compete agreement regulation has been within individual states’ purview. However, recent developments have shed light on the federal government’s interest in this area, signaling potential changes that could impact employers and employees across the country.

Staying Informed and Proactive

As the federal government desires to place greater restrictions on employment non-compete agreements and as Minnesota prepares to implement its ban on non-compete agreements, employers face a new legal landscape that requires careful consideration and strategic adaptation. By staying informed and proactive employers can navigate these changes successfully. If you find updates overwhelming, you are not alone. A Davenport Evans lawyer is here to help. Contact a lawyer at [email protected], 605-336-2880, or find a specific lawyer here.

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. Please consult with an attorney to understand how the recent federal and state actions may affect your specific situation.