Hello Biden, Goodbye Employee Noncompete Agreements?

December, 2020

In the Media

President-elect Joe Biden made a campaign promise to “work with Congress” to eliminate nearly all types of noncompete clauses in employment agreements.

The clauses, which prohibit employees from accepting new positions at competitors for a certain period of time, are widely used by fund shops, particularly in contracts with higher-level executives, say industry lawyers and recruiters.

Doing away with noncompetes “would be a big change” for asset managers, says Erik Weibust, a partner in Seyfarth’s trade secrets, computer fraud and noncompetes practice.

Employers use noncompetes to protect trade secrets, confidential information and customer relationships. The length of time that an employee is supposed to sit on the sidelines is typically six months to a year but can be as long as two years.

Across industries, about half of companies with more than 500 employees used noncompete clauses with some workers, according to a 2017 survey of more than 630 firms cited in an Economic Policy Institute paper. Roughly 43% of firms with fewer than 100 employees used noncompetes.

Whether companies enforce noncompete provisions depends in part on the laws of the states in which they operate, Weibust says. And 47 states and the District of Columbia permit enforcement of the clauses.

From the employee’s perspective, the clauses curb career advancement opportunities as well as pay potential.

“It holds them,” says Jeanne Branthover, DHR International’s global leader of financial services and cohead of the New York office. “A noncompete is going to make people think twice about leaving.… That’s the whole point.”

Branthover says she frequently works with executives who are subject to such clauses and that companies use them for professionals across functions, including those who work in investment, technology, risk and compliance, and sales.

Being bound by a noncompete was associated with an 11% increase in the length of time in a job, the Economic Policy Institute’s paper states, citing separate research.

Biden argues that wide use of noncompetes has led to lower pay. “If workers had the freedom to move to another job, they could expect to earn 5% to 10% more,” his policy statement says, referring to Treasury Department research.

In addition to noncompete provisions, asset managers also generally use other types of restrictive covenants in employment contracts, such as bans on soliciting former clients and investors, says Megan Bisk, a partner in Ropes & Gray’s labor and employment practice.

If future legislation or regulation prohibiting noncompetes allowed for non-solicitation clauses, for example, then those would “still provide some degree of protection” to employers, Bisk says.

Managers also often use “forfeiture” clauses in employment contracts, which dictate that employees will be eligible to receive certain compensation in the future if they refrain from competition and solicitation, Bisk says.

Indeed, the impact of legislation or regulation that eliminates noncompete clauses from employment contracts would depend on the exact limitations imposed, she says.

“Certainly, not being able to use straight noncompetes would have repercussions, but then the question would be, which of these other tools would be available to the employer?” Bisk says.

Some employees negotiate with their companies over whether they will be paid during the noncompete period, which is often referred to as a “restricted period,” and if so, how much, she says.

The restricted period stemming from a noncompete clause differs from a garden leave because the executive is no longer employed at the company. With garden leaves, the executive remains an employee and has a “continuing employee duty of loyalty,” according to a note by Epstein, Becker & Green.

Biden pledged in his campaign materials that he would only allow noncompete agreements “that are absolutely necessary to protect a narrowly defined category of trade secrets.”

If shops could no longer use noncompetes, employers might tap laws protecting trade secrets and confidential information to a greater degree, Seyfarth’s Weibust says.

In the past year, SS&C Technologies has twice sued former executives for allegedly violating their noncompete clauses by stealing valuable data about clients and prospects and then using it at a competitor.

A spokesperson declined to comment on the firm’s noncompetes policy.

Trade secret violations can be difficult to prove, Weibust says. For example, an executive may know all the steps or approaches that didn’t work in creating an investment process or new product, but it’s hard to prove a negative.

The rust-prevention product WD40, for instance, is named for the 40 attempts it took to get the product right, Weibust says.

If noncompetes go away, firms would likely boost their retention initiatives, says DHR International’s Branthover. They may compensate executives differently or use different succession-planning approaches, she says.

As with many other legislative and regulatory initiatives, the fate of noncompetes may ride to some extent on the January runoff Senate elections in Georgia, Weibust says.

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