The Uniform Law Commission Publishes Final Uniform Restrictive Employment Agreement Act
The Uniform Law Commission (“ULC”) recently published the final Uniform Restrictive Employment Agreement Act (“Act”). Restrictive employment agreements – or restrictive covenants – are agreements that restrict an employee from working after the employment relationship ends. The Act is a nonpartisan effort to promote economic innovation by reducing or eliminating the use of post-employment restrictive covenants that do not benefit competition while promoting clarity and predictability of the law governing these agreements through a uniform act. While the ULC is a state-supported organization, it can only recommend that states pass the Act. However, when the ULC approves an Act designated as “Uniform”, it does so based upon “substantial reason to anticipate enactment in large number of jurisdictions . . ..”
Governments Are Putting More and More Restraints on Restrictive Covenants
In part, the ULC anticipates wide-ranging adoption of the Act because it comes at a time when restrictive covenants are under assault from state and federal governments. Especially as a result of the pandemic’s effect on labor markets, they are being attacked with more success in the courts.
In 2019, a bipartisan group of senators led by Republican Senator Marco Rubio introduced the Workforce Mobility Act, which would generally ban non-compete agreements. It was reintroduced in the House on February 25, 2021. Then, on July 9, 2021, President Biden issued the order, “Executive Order on Promoting Competition in the American Economy.” As explained in more detail in a previous blog post, among other things, the executive order encouraged the FTC to use its rulemaking authority to curtail the use of non-compete clauses and other agreements that may unfairly restrict a worker’s ability to change jobs.
At the state level, multiple jurisdictions essentially ban noncompete agreements. Between 2018 and 2021, eighteen states enacted some form of new constraint on restrictive covenants. All of this new legislation has led to even more variation in state laws governing restrictive covenants. Some states are enforcing noncompete agreements, but not nonsolicitation agreements. Other states are enforcing all types of post-employment restrictive covenants. The increasing dissimilarity in states’ approach to regulating restrictive covenants makes it difficult for companies that engage workers in multiple states to draft restrictive covenants they can reasonably expect will be enforced in different states. Moreover, given the rise of the remote workforce, it is more likely that even smaller local companies may employ workers in other states.
Differing Restrictions Among the States Are Behind the Argument for a Uniform Approach
Thus, it is not surprising that, during a recent FTC workshop focused on ways to implement President Biden’s executive order, many participants agreed that there was value to a national standard for restrictive covenants, as long as it actually protects workers and balances those protections with the needs of the companies that hire them. The participants did not necessarily agree that a federal national standard was the right approach. Passage of the Act by the states would promote uniformity while keeping the regulation of restrictive covenants in state hands, where it has always been.
In addition to promoting uniformity, the Act seeks to balance the needs of workers with those of employers by retaining the positive effects of restrictive covenants, such as the protection of trade secrets and customer relationships, while eliminating the abuses that restrict worker mobility. In particular, the Act also seeks to eliminate some of the thornier issues that have been treated differently, such as whether independent contractors are included within the definition of “employee”. The Act uses the term “worker” rather than employee to make clear that independent contractors are covered. The Act also attempts to deal with the differing scope of state laws regarding the types of restrictive covenants by recognizing seven – noncompete, no-business, nonsolicitation, no-recruit, confidentiality, payment-for-competition, and training repayment – and establishing requirements for each. Generally, the requirements are aimed at limiting abuses by employers and include: prohibiting (rather than simply refusing to enforce) restrictive covenants under certain conditions; requiring employers provide clear notice of the restrictive covenants in their agreements; and permitting workers to obtain attorney’s fees if they successfully challenge or defend against the enforceability of a restrictive covenant or prove a violation of the Act. Reinforcing the importance of nationwide uniformity, a provision is included directing courts to consider the promotion of uniformity in applying and construing the Act.
While stakeholders are not likely to agree with every provision of the Act, it does appear to be a balanced effort to address the abuses of restrictive covenants while promoting clarity through nationwide uniformity of the law. Employers benefit because they want to retain talent, maintain client relationships and protect trade secrets. They also want to hire workers away from their competitors. Thus, even though the comprehensive Act is so new that it has not yet been enacted in any jurisdiction, it is worth becoming familiar with it now.
Do you have a legal question regarding the Uniform Restrictive Employment Agreement Act or your rights as an employer or employee? Give Elizabeth Wright, Esq., of Parker Daniels Kibort a call at 612.355.4100.