How HR should be thinking about noncompetes in light of potential state, federal bans

New York employers that commonly rely on noncompete agreements may continue to use them—for now—following Gov. Kathy Hochul’s Dec. 23 veto of a wide-sweeping ban.

The ban, which was passed by New York legislators in June, would have prohibited nearly all types of noncompetes. These contracts limit an employee’s ability to go work for a competitor for a certain period of time after their employment at another organization ends. They’re common in sectors such as sales and finance, but their use in lower income industries such as hair styling or food service has come under scrutiny in recent years. Some common criticisms of noncompetes are that they quell innovation, as well as limit workers’ salary potential and career mobility.

Hochul vetoed the New York ban after negotiations broke down over issues, including an effort to set an income threshold that would still allow workers making over $250,000 to enter into a noncompete. The governor said she still believes noncompetes should be restricted for lower wage workers, and New York lawmakers are expected to take up a measure banning them again in 2024.

Five states have fully banned noncompete agreements, and some are looking to crack down further on them. California, for example, has long banned noncompetes, but recently enacted a law that extends enforcement outside of state lines. The Federal Trade Commission is also considering a rule to ban noncompete agreements; a final version is expected in April 2024.

As more jurisdictions and the federal government move to limit the use of noncompetes, legal experts offered tips for HR departments to effectively navigate the changing environment.

Understand your reasons. When employers draft noncompetes, “They need to think about what it is they are seeking to protect,” Shawn Matthew Clark, a New York-based attorney with law firm Littler Mendelson, told HR Brew. Whether they’re seeking to protect trade secrets, client relationships, or confidential information, HR should tailor agreements around those assets “in a way that wouldn’t run afoul of any noncompete ban in any state,” he said.

Not every employee needs a noncompete, Clark said, noting that considerations for a receptionist will be different than those for a CEO. “Employers really need to think about who gets a noncompete [and] why they’re getting it,” he said. “And that should be the driving force behind how we draft it.”

Lauren Aydinliyim, an assistant professor of strategic management at the City University of New York’s Zicklin School of Business at Baruch College, said it’s important to put yourself in the shoes of employees who are being asked to sign these agreements.

Ask yourself, “How would you feel about being asked to sign a non-compete in this case?” she said. “And if it starts giving you some pause, maybe that’s the time that you either want to check in with legal counsel or check in with the higher ups.”

It may be worth taking the time to explain the reasons for a noncompete to employees, as well. Aydinliyim noted there can be a lot of “information asymmetry” between the employer and employee when it comes to noncompetes. If an employer isn’t educating their employee about why a certain clause is being included in their contract, she said, it can in turn affect workers’ bargaining power.

Consider alternatives. In case noncompetes do become illegal, either because of a state or federal policy, HR may be thinking about ways to protect their employers by including other types of provisions in their contracts.

An executive assistant to a CEO might not meet the wage threshold in some states to allow for a noncompete, Aydinliyim said, but could still have a lot of access to proprietary information about a company. “So, what other ways can we also protect that besides just using a noncompete, making sure that you’re leveraging this whole suite of possible restrictive covenants appropriately, and using the right one for this specific scenario that you’re dealing with?” she continued.

In the absence of a noncompete banning an employee from going to work for a competitor, employers may consider a non-solicitation provision, for example, Clark said. This would allow them to join a competitor, but prevent them from soliciting a former employer’s clients or vendors. Additionally, a nondisclosure agreement could prevent departing workers from sharing confidential information with a competitor.

Check your templates. Aydinliyim cautioned that HR should be careful about using contract templates as laws regarding noncompetes evolve. While it can be tempting to quickly generate an offer letter or termination agreement from a template, such models should be “tailored appropriately to the job that you’re dealing with,” she said.

She also recommended reviewing employees’ offer letters closely when they’re promoted or advance to a new role, given a stricter covenant may make sense when a worker enters a higher-level role, but not when they first join the company.