As of now, each state has its own laws regarding the enforceability of non-compete agreements. For example, in Florida, the law generally permits companies to enforce reasonable non-compete agreements to protect trade secrets, confidential business information, substantial customer relationships and goodwill, specialized training, and more. On the other hand, California law generally prohibits non-compete agreements save a narrow exception protecting trade secrets.
For a large portion of the U.S. workforce, the uncertainty surrounding non-compete agreement enforceability may soon change. This is because Congress is considering a proposed bill to prevent non-compete agreements on the federal level for non-exempt workers.
The “Freedom to Compete Act”
At the start of 2019, Florida Senator Marco Rubio proposed a bill that would amend the Fair Labor Standards Act (FLSA). If passed, the “Freedom to Compete Act” would effectively prohibit non-compete agreements for companies involved in interstate commerce that restrict any of the following:
- Working for another employer
- Working in a specific geographical area
- Working in a similar field as prior work
Not only would the amendment ban new non-compete agreements, but it also aims to void any existing agreements and prevent their enforcement by employers. The major caveat to the Act is that it only applies to workers who are considered to be non-exempt under FLSA. Managers, highly skilled employees, and others who are exempt from FLSA’s wage and hour provisions may still be susceptible to non-compete provisions. While the bill is still in its very early stages, you can bet companies across the United States will be watching to see what happens and how a possible new federal law will affect them.
Possible Effects of a Non-Compete Ban
While a federal ban on non-competes will make the law clearer for many employees, applying to ban only to non-exempt employees may cause some problems. First, it could lead to many disputes about whether an employee was correctly classified as exempt or non-exempt. These disputes already exist when an employee claims they deserve back pay for unpaid minimum wage or overtime payments or compensation for other FLSA violations. And in reality, many employers try to blur the lines to wrongfully classify employees as exempt to avoid compliance with FLSA. Additionally, many companies simply make mistakes when it comes to classifications of employees.
This only adds another reason why employee-employer conflicts regarding FLSA exemption can come up. Exempt employees who want to void their non-competes may initiate litigation regarding their status, and employers may even face liability for other types of FLSA noncompliance if the employee prevails.
The bill also causes potential issues regarding people in sales positions. According to current law, inside sales employees are non-exempt while outside sales employees are exempt. However, non-compete agreements are especially critical for sales employees, as they often have direct access to potential and current customer lists that companies may want to protect. The new law would no longer allow non-competes for inside sales employees, however, so companies may have to switch to non-solicitation agreements or other enforceable agreements should the bill pass.