U.S. Senators Al Franken (D-Minn.) and Chris Murphy (D-Conn.) proposed federal legislation last week to ban the use of non-competes for low-wage employees and require companies to provide advance notice before asking potential employees to sign non-competes. Senators Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.) are cosponsors of the bill.
The stated purpose of the legislation, entitled the Mobility and Opportunity for Vulnerable Employees (MOVE) Act, is “to prohibit employers from requiring low-wage employees to enter into covenants not to compete, to require employers to notify potential employees of any requirement to enter into a covenant not to compete, and for other purposes.”
In a prepared statement Franken said, “Forcing lower-wage workers to sign ‘non-compete agreements’ makes it harder for these workers to find new jobs and stay employed. Agreements like these stifle fair competition and harm workers. We need to challenge this practice, and change the law to protect people who are simply trying to make ends meet. Our bill will fix this issue by removing unnecessary employment barriers that hurt everyday Americans.”
“Non-compete agreements hidden in low-wage worker contracts deliberately trap these workers in low-paying jobs – and that’s unacceptable,” said Murphy, in his prepared statement. “I worked hard on this bill because I believe that if you’re making less than $15-an-hour, the government has a moral duty to stop companies from exploiting your hard work by preventing you from using your skills and experience to work your way up. The MOVE Act helps low-wage workers by opening new doors and providing them the freedom to pursue better career opportunities.”
Murphy also claims that research shows that employers force anywhere from 8-15% of low-wage workers to sign non-compete agreements in an effort to dissuade those workers from seeking better, higher-paying jobs within the same industry.
The MOVE Act will ban the use of non-compete agreements for employees making less than $15 an hour, $31,200 per year, or the minimum wage in the employee’s municipality, and will require employers to notify prospective employees that they may be asked to sign a non-compete agreement.
Covenant not to compete is defined in the MOVE ACT as:
“an agreement (A) between an employee and employer that restricts such employee from performing
(i) any work for another employer for a specified period of time;
(ii) any work in a specified geographical area; or
(iii) work for another employer that is similar to such employee’s work for the employer included as a party to the agreement . . . .”
It also requires employers to post notice of the Act in a conspicuous place on the premises.
Section 4 of the MOVE ACT provides that:
In order for an employer to require an employee, who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce) and is not a low-wage employee, to enter into a covenant not to compete, the employer shall, prior to the employment of such employee and at the beginning of the process for hiring such employee, have disclosed to such employee the requirement for entering into such covenant.
Under the MOVE ACT, the Secretary of Labor shall impose a civil fine of $5,000 with respect to any employer who violates the ban or notice requirement an amount not to exceed $5,000 for each employee who was the subject of such violation. Employers will also be fined $5,000 for failure to post the appropriate notice. In determining the amount of any civil fine, the Secretary shall consider the appropriateness of the fine to the size of the employer subject to such fine and the gravity of the applicable violation.
Based upon the proposed statutory language of “covenant not to compete,” it is unclear whether it applies to non-competition agreements alone or non-solicitation agreements and other restrictive covenants (e.g. non-disclosure) as well.
Additionally, it requires virtually every employer in the United States to provide advance notice to prospective employees prior to using a “covenant not to compete,” which as indicated above may mean more than just a non-compete agreement.
Also, it is unclear whether the notification requirement governs non-compete agreements introduced with existing employees who are later asked to sign such agreements. Additionally, it appears that the proposed legislation requires that employers ensure that employees’ compensation exceeds the minimum threshold of being considered a low-wage worker throughout their employment or run the risk that the non-compete violates the law, even if the agreement was valid at execution.
The proposed legislation also assumes that wages and salary is the key factor in determining whether a non-compete should be enforceable.
The enforceability of non-compete agreements has typically been governed by state law with state courts determining the reasonableness of such covenants.
At first blush, one wonders whether this legislation is really necessary and whether state courts are actually enforcing non-compete agreements against “low-wage workers” and whether employers are actually trying to use and enforce such agreements. Also, one also wonders whether any existing non-compete agreements with “low-wage workers” in reality limit employee mobility or whether this is legislation in search of a problem.
The proposed legislation does serve as a reminder to employers to conduct a survey of their current restrictive covenant agreements and protection plans and ask themselves the following questions:
What legitimate interests are they trying to protect in their agreements?
Are they using the right agreements with the right employees?
Are there some employees that they need to ask to sign non-competes and others that they don’t?
Should they consider using non-solicit agreements instead?
Does continuing employment constitute sufficient consideration for the agreements? Or is new consideration required? If so, what is sufficient consideration?
Are the time duration and geographical restrictions contained in the agreements sufficiently tailored?
We will continue to closely follow this legislation and provide an update on any material developments.