With Labor Day looming, President Joe Biden’s recent overture to restrict noncompete agreements comes at the right time. The day set aside to honor working people, which falls on Monday, Sept. 6, provides an opportune occasion to recognize the shortcomings of these age-old restrictive devices and commit to curtailing them.
But it may be more than a century too late.
Earlier this summer, shortly after Independence Day, the president directed the Federal Trade Commission (FTC) to expand the liberty of employees by seeking to limit the use of these restrictive devices that prevent (or punish) workers from seeking jobs in competitive positions after leaving their current workplaces.
These contractual clauses have been around for a long time, dating back to the end of the 19th century in Minnesota. However, their use was sporadic until recent times, booming in the last couple of decades of the 20th century and proliferating in the 21st. While they have been most prevalent in high-tech fields, sales, and some other businesses, they have penetrated to even low-level employees, too.
Fast food fracas
The president’s directive came in the form of a sweeping executive order asking the FTC to examine and curtail various anti-competitive practices, including those that harm consumers by limiting choices and raising prices. In doing so, he deemed these post-employment restrictions to be imbued with anti-competitive features.
The Biden Executive Order, the 52nd of his presidency so far, appeals to an attentive audience. The newly confirmed chair of the agency, Lina Khan, has long favored federal rules targeting noncompetes as antithetical to competitive practices. A couple of years ago, writing in a law review, she maintained that such clauses “deter workers from switching employers, weakening (their) credible threat of exit, and diminishing their bargaining power.” But the federal foray into noncompetes is unusual because the contractual employment arrangements have traditionally been matters of state law, which vary from jurisdiction to jurisdiction.
An eclectic trio of states prohibit their usage in nearly all circumstances: North Dakota, Oklahoma, and California, where they have long been banned largely due to the prevalence — and clout — of the entertainment industry. Most other states uphold them, subject to very limited oversight, while about a third of them, including Minnesota, allow them under somewhat restricted circumstances.
The president’s effort to overhaul noncompete agreements was, according to published reports, the fulfillment of a campaign pledge. If he did pledge it in his route to the Oval Office, it went below the radar and certainly was not a major issue, or even a minor one, during the last presidential campaign.
But the impetus for federal scrutiny of these restrictive devices was boosted by the initiation a few years ago of noncompete agreements among fast food service workers, an unusual group to be subject to those arrangements, spurred by the Jimmy John’s operation. The prospect prompted calls for legislation, championed by then-Sen. Al Franken of Minnesota, who was in the forefront of a measure to ban such agreements in that industry. The proposed national ban went nowhere, and Franken left the Senate at the end of 2017.
The campaign for change was accelerated by the COVID-19 pandemic, which imposed disproportionate impact on low-level workers, including those in the fast food industry. Some legislative responses followed, including a measure in New York City giving them greater rights in connection with discipline and scheduling, too. The latter also has been embedded in local ordinances in Minneapolis and St. Paul as part of a broader uplifting of minimum wage requirements and other time-off benefits for employees, which have been upheld against legal challenges.
But noncompete agreements have been outside the scope of legislative attention at the state and federal levels, until the issuance of Biden’s edict.
Minnesota: Noncompetes OK in limited circumstances
Minnesota is among those jurisdictions, that allow noncompete agreements under limited circumstances. It has done so only as a matter of judicial decision making, unguided by any statutes. In contrast, neighboring Wisconsin has a statute that regulates noncompete agreements, pursuant to legislation.
In Minnesota, noncompete agreements will be upheld if they are deemed by judges to be reasonable in scope, duration, and other features, although they may exercise the power the “blue pencil” doctrine to modify them if they are considered to be overbroad or otherwise abusive.
The most significant restraint in noncompete agreements in Minnesota, and about 16 other states, is the doctrine of “independent consideration.” Under this tenet, noncompete agreements generally will not be upheld unless they are entered into at the very commencement of an employee relationship, and sometimes required to be called to the attention of an employee even before the arrangement begins. If entered into after employment begins, there must be some type of “material advantage” given to the employee, such as a pay raise, offer of stock, or other emolument to justify the limitation on future work opportunities.
Additionally, noncompete agreements must be of finite duration, usually limited to a year or two, and sometimes less, depending upon the particular business or industry. They also must be set forth in specific written documentation, narrowly tailored to protect the employer’s interest, and not overbroad in terms of scope or geographic reach.
Efforts to limit noncompetes, or eliminate them altogether, have been undertaken occasionally in the Minnesota Legislature, but to no avail. Attempts to advance legislation comparable to that in neighboring Wisconsin were stymied in the early part of the millennium.
An effort to revive that type of legislation failed a decade ago. If enacted, it would have essentially eliminated most noncompete agreements, except those tied to the sale of a business. But the measure got little traction, especially due to strong opposition from the business sector, and, like predecessor efforts, died without reaching the floor of the respective bodies in the legislature.
Despite the shortcomings of non-competes, the law recognizes the benefits of these restrictive devices in appropriate circumstances.
When used properly, noncompetes can be beneficial, encouraging employers to invest time and resources in their employees without fear that they may leave for a competitor or start their own businesses. This is particularly so for employees who have access to formulas, pricing information, data about customers of close relationships with them and other proprietary information, although a law exists, the Uniform Trade Secrets Act, that occasionally can be invoked to protect against misappropriation of these matters.
But they also can be abused by management, preventing employees from exercising mobility and minimizing their ability to negotiate better terms and conditions of employment at their current jobs, including increased wage rates and benefits.
It is not only employees who suffer from abuse of noncompete agreements. Although generally favored within the business community, noncompetes also can also hurt businesses by preventing them from securing talented employees from competitors. In those situations, noncompete agreements become disadvantageous to both employees and their prospective employers as well.
It will take a long time to determine whether Biden’s overture will succeed as it faces a long path through administrative channels, legislation, and undoubtedly court challenges that will assert, among other matters, that the federal government has no right interfering with measures of this type reserved to the states under the 10th Amendment of the U.S. Constitution.
But even if Biden’s bid to ban noncompetes fails at the federal level, it draws attention to the need for significant reform of noncompete laws, especially here in Minnesota, where the law varies with individual predilections from judge to judge, without any overarching statutory guidance.
Noncompetes are traceable to the horse-and-buggy era in Minnesota. Whether Biden’s thrust is successful in reining them in is a topic whose time has come.
Marshall H. Tanick is a Twin Cities attorney with the Twin Cities law firm of Meyer Njus Tanick.
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