What Are Non-Competes and Why Are They in the News in 2021?

What Is A Non-Compete Agreement?

A non-compete is the same thing as a noncompetition agreement, just another way of saying it. They are “restrictive covenants” found in either an employment agreement or as a separate agreement at the time employment begins. Their purpose (whether or not it's good or bad) is for the employee to agree not to compete with their employer by starting a similar business. The challenge with noncompetes is they not only affect the employee during their work with the employer but after; in which case they may want to open up their own business but may be restrained from doing so. 

Are Non-Competes Allowed in Oregon, California, and Washington? 

Non-competes are illegal in California. California Business and Professions Code Section 16600 states, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

In Oregon and Washington they are legal and enforceable but strictly construed (ie. they have to follow legal requirements and regulations in order to be upheld). 

Both OR and WA haven’t thrown them out, but each year they pass more rules that make them difficult for the employer to enforce. For example, in Washington in addition to all of the other requirements as of 2020, requires that an employee who has a noncompete earn $100,000 or more for their salary (which allows most employees to get out of the noncompete, unless you’ve been blessed with a very high paying job). 

Here are a few rules Oregon put into place over the past few years:  no more than 18 months or less for duration of the noncompete, and telling the employee 2 weeks prior to their start date that they will have to sign a noncompete.  Oregon’s rules have grown to include requiring employers who want to enforce a noncompete giving the employee 30 days from their resignation or termination a signed copy of the agreement they signed. 

Do Courts Throw Out Non-Competes Even if State Rules Are Followed? 

Yes. A judge may agree that the non-compete distance is not “reasonable.” For example, even if all the rules are met, telling a past employee they can open a landscaping business anywhere in Oregon would be a “stranglehold” or a restraint of livelihood. Courts may choose to edit it instead of completely holding the non-compete unforceable ---making it enforceable but making it more reasonable for all involved. A judge may also agree that the employee’s role wasn’t a key part of the company and they didn’t have access to proprietary information or weren’t doing the company’s service or product directly. For example, a non-compete for an employee interior designer is more likely to be upheld if all of the state rules and processes are followed. However, an office manager at the interior design firm may not have to worry as much about the enforceability. 

There are so many things to say about this complex issue, but we will move forward to some other helpful areas. 

Do Non-Competes Apply to Independent Contractors? 

No! While an independent contractor may have a non-solicitation clause in their contract or a separate non-solicitation agreement, all non-competes (even if they are in a state where they are legal) do not and will not apply to contractors. 

The main difference of the two types of documents is that the non-solicitation clause or agreement is less restrictive, and it’s narrowly aimed at preventing a contractor from soliciting co-contractors or employees of the company they are working for and/or clients of the company.

Contractors while being contracted with a company are allowed to work on other contract jobs and have their own business (ie. otherwise they may fall into the employee category). If one of these clauses or separate agreements exists and is signed, you cannot do what is known as “poaching.” 

Biden’s New Executive Order in 2021

President Biden signed “Executive Order Promoting Competition in the American Economy” on July 9, 2021. It encourages the Federal Trade Commission (“FTC”) to employ its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” 

Does Biden’s Non-Compete Order Affect Me?

At this point, not directly. However, if you are a federal employee, then 100% yes. If you are a federal contractor, a small business owner, or have some other career, then no. And, according to the administration, the order “encourages” vs. forces.  Read more here.

It may also affect all of us in terms of how non-competes are looked at. For example, many of our clients are currently in a 9-to-5 employment situation plotting their small business formation exit. Many have or will open a business relating to the services or products they offered through their employer when they were employed. Knowing that states are holding them illegal or enforceable only if done correctly is vital information. So is knowing that the federal government itself is headed the same direction.

What Now? 

If you are an employer and want your employees to have a non-compete, you must make sure to cross your t’s and dot your i’s throughout the process. Read closely the current rules that apply in the state(s) involved.  If you are an employee now or a past employee opening a business, you want to check 1. Did I sign a non-compete? 2. What does it say/mean? 3. Is it enforceable? 4. If I think it may be enforceable, can I ask my employer to release me from it? 

If you have questions about non-competes or anything business or intellectual property law, please schedule a no cost consult with our firm.