October 27, 2021
President’s Executive Order
The enforceability of non-competition agreements (NCAs) has been a hot topic in many industries since President Biden issued his July 9, 2021 Executive Order. The Executive Order does not bar or even limit NCAs. Rather it is a directive to the Federal Trade Commission to analyze the issues surrounding NCAs and promulgate rules. Although the media has framed this section of the Executive Order as seeking to ban non-competition agreements in employment contracts, the plain language of the Order makes clear that the Administration at this time is seeking to target what it feels are “unfair” uses of NCAs that “unfairly” limit worker mobility.
Regardless of whether the FTC has the authority to do so we anticipate that it will promulgate rules relating to NCAs within the next 12 months. We expect that the FTC will prohibit NCAs for lower wage earners, as defined by the FLSA, and will require that an NCA be presented prior to the acceptance of an offer of employment or promotion. When these regulations are issued there will be litigation over whether the FTC has acted outside the scope of its authority.
This is not just an issue at the Federal level. A few states have already adopted legislation either prohibiting NCAs or limiting their scope. Many other states have recently introduced legislation, that although not successful, demonstrates that this is an issue of concern to state legislatures. It is more likely changes in the laws governing NCAs will come from the States as opposed to Congress or Federal administrative agencies.
Creating Enforceable NCAs
You have hired a new associate. You spend countless hours training and mentoring the associate. You expend resources to market the associate to the community you serve, only for the associate to leave for a competitor, or start up his/her own practice in direct competition with you. That story does not have to happen. In most states a Practice has the right and ability to protect its legitimate business interests through NCAs.
1. Know Your State’s Law: California, North Dakota, Oklahoma, and have enacted legislation effectively bans NCAs in most circumstances, and Washington D.C.’s law will go into effect in 2022. Other states have implemented laws that prohibit NCAs for low wage employees or require that the employee be provided with some level of compensation during the restrictive period. Some states have implemented requirements regulating when a NCA can be issued to an employee. However, most states still will still enforce an NCA that contains reasonable terms.
2. Cleary Define the Services Your Practice Provides: If your practice provides emergency services, mobile services, home visitation services, or another specialty be sure to identify those specialties in both the employment agreement and restrictive covenant. If the agreement only states that the associate will provide general veterinary services to companion animals and that employee then seeks employment with a specialty practice a court may find that the two practices are not in competition and may not enforce the NCA.
3. Identify The Prohibited Activities: Specifically articulate the activities the associate is prohibited from engaging in, and the classes of individuals or entities the associate is prohibited from soliciting.
4. Imposing a Reasonable Geographic Scope: This is going to vary based on the location of your practice. A reasonable geographic scope in an urban area will be different than in a suburban or rural area. This will also vary depending on the type of practice. The reasonable scope for general veterinary practice will be less than one for a specialty practice.
5. Imposing a Reasonable Duration: Generally 1- 2 years is considered reasonable. However, if an associate does not work out within the initial 60-90 day period of employment a Court is not likely to impose a 1-2 year NCA.
A reasonable NCA will apply only to employees who are in a position to compete with the Practice. This means veterinarians, practice managers, operations and financial officers. It should be provided to the employee at the time of hire, when given a promotion, or a bonus. An NCA with a tech or assistant is not likely to be enforceable. The NCA should identify what key services that employee provides to your practice, and what the employee is being prohibited from doing. The time and geographic restrictions should be reasonable in nature when considering where the Practice is located and the type of Practice.
Finally, it is important to remember that non-solicitation agreements (NSAs) can be just as useful as NCAs in protecting your Practice’s business interests and NSAs are not subject to the regulation and judicial scrutiny that NCAs are.