The origins of noncompete agreements can be traced back to 1414 when an apprentice pledged not to practice his trade in the town where he was trained, under the risk of fines. Throughout history, these clauses were introduced to minimize competition between services or products and prevent the emergence of rivalries.

The Past and the Present

During the 1400s, many townships and villages had their designated specialists, like thatchers who built and repaired roofs to protect homes from the elements. If a new thatcher arrived, it posed financial challenges for the existing one. Competition for customers would intensify until someone realized the town couldn’t sustain both businesses. An agreement was reached, resulting in the concept of noncompete clauses. 

Rules, exceptions, and sanctions were established to ensure craftsmen adhered to agreements. Violations led to various consequences, from imprisonment to fines. Despite these contracts seeming insignificant compared to those involving Fortune 500 companies, they occasionally escalated into fierce battles where the victor claimed a monopoly on that particular business. The once-“one guy” emerged as the exclusive provider once more. 

Moving forward in time, noncompete clauses grew more intricate. Specific companies required their employees to sign agreements preventing them from launching similar ventures or working for competitors within a set period. With the increase in the dollar’s value, fines have become substantial, potentially leading to lawsuits for lost profits and revenue. Depending on the nature of the work, it might even result in a court-ordered injunction. 

Noncompete Legal Battle

At present, the Federal Trade Commission (FTC) is actively advocating for the elimination of noncompete agreements. In September 2021, Commissioner Christine Wilson initiated this effort by testifying before the House Judiciary Committee Subcommittee, urging for a ban on noncompete agreements. During her testimony, she provided evidence that these agreements negatively impact the economy, small businesses, and overall growth. 

Several states are emulating her approach by banning noncompete agreements within their jurisdictions. As of July 2023, California, North Dakota, Oklahoma, and Minnesota have outright prohibited such agreements. Other states have supported the ban, with a specific exception that has been introduced. If employees earn wages above a designated threshold, the agreements remain valid. This provision enables low-income workers to progress, allowing them the opportunity to establish their own businesses or work for employers recognizing their value by offering higher wages or improved benefits. 

The Exception 

The FTC advocates for fostering “healthy competition” between businesses through their proposal, includes a nearly complete ban on noncompete contracts. However, there is one exception: if a business is sold or bought out, an employee who holds 25% or more ownership cannot establish a similar company offering identical services and/or products. This 25% ownership qualifies the individual as a substantial “owner.” If someone possesses less than 25% ownership and is designated as a worker, they are considered a passive investor, and the noncompete clause still applies to them. 

The FTC received more than 270,000 comments from various parties regarding the prohibition of noncompete agreements. Due to the extensive feedback, the release date for the follow-up proposal has been postponed to April 2024. 

If you’re unsure about your compliance with your state’s noncompete regulations, reach out to a legal advisor or HR professional. When this ban is enforced, significant adjustments might be necessary. Stay proactive and ensure your business is safeguarded and adheres to the applicable guidelines. 

Paul Carelis, SHRM-CP, PHR – VP of HR Services, MP

Paul has over a decade of experience in the HR consulting space, working with businesses of all sizes and industries, leading a team of SHRM-certified HR professionals at MP. Together, they assist clients with compliance, training, and HR guidance, and support for the full employee life cycle. 

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