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April 6, 2023

CT, feds seek limits on non-compete agreements across industries

CT-N State Sen. Julie Kushner, D-Danbury, at the Labor and Public Employees listening to testimony on non-compete agreements at a February hearing.

As Connecticut legislators and the Federal Trade Commission both consider limiting non-compete clauses, workers are sharing their stories about these agreements, which can establish restrictions on where and when they can take a new job within their same field.

One 32-year-old hair stylist who has worked in Greenwich for 12 years was required to sign a non-compete agreement and has been unable to start a business because of the covenant, despite dealing with the salon’s “poor management and lack of leadership.”

Others’ stories submitted for public comment to the FTC offered a window into what these contracts mean for the health care sector in Connecticut, as either a working physician or a patient trying to receive care. One physician said they ran into trouble opening up a practice after working for a major health system in the state, while a Massachusetts-based surgeon who also works at a hospital in Hartford said he is locked into a contract that does not allow him to compete within 15 miles of the area.

About half of private-sector businesses require workers to sign a non-compete agreement, which affects anywhere from 36 million to 60 million employees, according to 2019 data from the Economic Policy Institute. Polling shows a majority of Americans support largely banning the practice.

Critics argue that they stifle competition in the workforce and keep wages low for workers who have little to no leverage to negotiate or leave for a higher salary.

“I’m not sure there’s any evidence that non-compete agreements promote competition and innovation,” said Josh Goodbaum, a lawyer representing employees in Connecticut who supports state and federal efforts to restrict them. “They keep people from leaving their jobs. They can’t negotiate for higher wages. They are tied to wage stagnation. Non-competes cost workers money.”

But others see them as largely necessary, at least when it comes to workers who are privy to high-level information or trade secrets that can hinder their company if they depart for a competitor.

Business groups, however, have acknowledged non-competes are not appropriate in many cases. Eric Gjede, vice president for public policy with the Connecticut Business and Industry Association, said workers in “front-line retail” should not need to sign them. But he said the state bill’s proposed wage thresholds would apply too broadly and exclude workers who are starting to gain access to proprietary information.

These contracts greatly vary by company and industry. They can prevent an employee from working for a competitor for a specified window of time that can span weeks to months to years. Some can expire during a worker’s tenure, but many endure regardless of the length of employment, even if that worker is laid off by the company.

At the federal level, there are proposed bills and regulations to restrict the scope of non-compete agreements.

Sen. Chris Murphy, D-Conn., and Sen. Todd Young, R-Ind., reintroduced a bipartisan bill — the Workforce Mobility Act of 2023 — that would limit the use of non-competes with exceptions to those involved in the sale of businesses or the end of partnership agreements.

Meanwhile, an independent government agency focused on consumer protection and competition law proposed a rule earlier this year that would essentially ban non-competes with few exceptions and would apply to all contracts retroactively. The Federal Trade Commission’s proposal is still in the public comment period, which was extended until April 19. The agency could then decide to stick with its original rule or make changes based on recommendations.

“Non-competes were long assumed to apply mainly to high-level executives with access to sensitive corporate information, but their use has significantly expanded in the past few decades, now binding about one in five American workers across income and job levels,” FTC Chairwoman Lina Khan said in a public forum in February. “Non-competes can hinder worker’s ability to pursue better opportunities, even harming those who are not personally bound by one.”

In Connecticut, the General Assembly is once again looking to limit the use of these contracts. This year’s proposal, House Bill 6594, would ban non-compete agreements for anyone earning less than three times the minimum wage and independent contractors earning less than five times the minimum wage. Connecticut’s minimum wage is $14 an hour and will increase to $15 an hour on June 1.

Outside those cases, the legislation would require agreements to be provided to employees sufficiently early in the hiring process — rather than after they have accepted an offer — and it would place other restrictions such as time limits on the agreements. It would not change existing non-compete rules for physicians, physical therapists and broadcasters, nor does it change non-solicitation rules governing the home health care sector. (A separate bill put forward by the Public Health Committee seeks to restrict non-compete clauses in physician and registered nurse contracts.) 

With congressional gridlock and the expectation of lawsuits potentially impeding federal action, lawyers and advocates following the push around non-competes believe any reforms or restrictions to these contracts would likely emanate from the state.

“The FTC proposal is great, but there’s a long road to get to that,” Sara Parker McKernan, a legislative and policy advocate for CT’s Legal Services, said in an interview. “In the meantime, it’s even more important that we not wait for federal proposals to get passed.”

CT at ‘competitive disadvantage’

Compared to neighboring states, Connecticut lacks statutes and regulations governing how non-compete agreements function within the state, with the exception of a few industries.

These contracts are left up to the courts and case law, though employment lawyers who work with clients involved in non-competes say they are rarely litigated and that many do not have the resources to take it to court. Judges in Connecticut must determine if a contract is “reasonable” and therefore enforceable based on the duration, geographic scope, fairness of the employer’s protection and ​​”the restraint on the employee’s ability to pursue the employee’s occupation.”

Workplaces that rely heavily on non-competes run the gamut. They were once mainly used for employees working with highly sensitive information, but have greatly expanded to include fast-food workers, hairdressers, house cleaners, law offices and other companies that largely employ low-wage workers.

Other types of documents used by employers to protect key information are non-disclosure agreements preventing workers from publicly discussing parts of their previous job and non-solicitation agreements limiting the ability to reach out to clients after their departure. But neither prohibits workers from pursuing new jobs with competitors under certain parameters.

But there are some carve outs in Connecticut for security guards and broadcasters. For physicians, a non-compete can be upheld if it is needed to protect “legitimate business interest” and “reasonably limited in time, geographic scope and practice restrictions.”

Any physician non-compete agreement signed or renewed on or after July 1, 2016 cannot exceed one year or prevent an individual from working in a similar position more than 15 miles away from the previous job. Employment lawyers note this protection does not apply to nurse practitioners.

New York and Massachusetts, meanwhile, have statutes that define when non-competes are enforceable and permissible. New York stipulates that these contracts can only be used to “protect the employer’s legitimate interests” and if it “does not impose an undue hardship on the employee.” And Massachusetts enacted a law similarly governing non-competes signed after Oct. 1, 2018.

“Because we’re in between New York and Massachusetts, it puts us at a competitive disadvantage, because it restricts employee mobility,” said Irene Bassock, a labor and employment lawyer who is secretary of the CT Employment Lawyers Association. “Connecticut’s not giving them those protections or incentives to come and work for a corporation based here.”

The absence of guidance leaves the standards in Connecticut “ambiguous,” according to Goodbaum, who works at Garrison, Levin-Epstein, Fitzgerald & Pirrotti, P.C. He said it creates challenges when trying to advise clients about whether their covenant is enforceable.

“I really think this is a serious problem in the state of Connecticut up and down the economy, not just because non-competes are unfair in many situations but because there’s such a marked lack of clarity about if a non-compete would be enforceable,” Goodbaum said.

“Even if all the Connecticut legislation was to create some clear rules about when it is or isn’t enforceable, that would be major progress,” he added.

CT legislation back in the spotlight

For several years now, the Connecticut General Assembly has weighed state legislation seeking to reform non-compete clauses in employment contracts. The legislature’s Labor and Public Employees Committee passed this year’s bill in February, and it now awaits debate in the House.

“While it is encouraging to see national action beginning, Connecticut cannot wait for policies that may be held up in the courts for years,” Patrick Hulin, deputy policy director for Gov. Ned Lamont, said in written testimony to the committee, referring to the FTC’s proposed rule.

McKernan said low-wage workers often feel forced to sign non-compete agreements, even in cases where they are not privy to trade secrets the way more specialized, highly paid employees might be. Once they have agreed to such clauses, many feel locked into their job.

During his testimony before the committee, Gjede of CBIA mentioned hair care professionals, golf course pros and clergy as examples where the clauses might be applied inappropriately under the bill’s definitions. But he argued the proposal goes too far when tying it in such a way to the minimum wage.

“Those are people who are starting to get to the point where they’re getting access to employer information. What we’re saying is let’s carve out the groups that we know shouldn’t be subject to these things, rather than just taking a multiple of a minimum wage,” Gjede said in an interview. “We’re taking an ax to a problem that probably should be addressed with a knife.”

The legislature’s Public Health Committee included provisions in Senate Bill 9 that would apply to physicians — who are excluded from the Labor Committee bill — and registered nurses, restricting non-compete clauses in their contracts. 

State Sen. Heather Somers, a Republican from Groton and ranking member on the Public Health Committee, has long advocated for these provisions. With widespread consolidation in the state’s health care systems, she said, it is even more difficult for doctors to change practices. In many cases, contracts stipulate that if a doctor wants to take a job with a competitor health system, they have to wait a year. 

Somers said the prevalence of these contract terms is driving Connecticut physicians to practice in other states, and it is preventing younger physicians from moving to the state.

“We have such an access problem now, we don’t have enough physicians, and actually keeping them out of the marketplace is only adding to that shortage,” Somers said in an interview.

But Somers said the circumstances in the health care sector are unique, and there are instances where non-competes make sense. As a way of protecting sensitive information, she said, employers could potentially pay the departing employee not to work for a certain number of years. Employment lawyers refer to that as “garden leave” — paying a former employee to not work at a competitor for a certain amount of time.

“If you’re in a corporate position, with very sensitive information … and you decide to just leave and go work for a competitor, there has to be some way to prevent you from telling all the secrets,” Somers said.

Waiting game on federal proposals

Once the public comment period wraps up in mid-April, the FTC will unveil its final rule on non-competes.

Depending on how it is ultimately structured, the regulation could change the nature of work and enable the freedom to change jobs for millions of workers in Connecticut and across the country.

But the forthcoming final rule will likely face lawsuits, which could delay — and ultimately block — implementation. Opponents have been resistant to the proposed rule, arguing that it would be applied too broadly to workplaces. The U.S. Chamber of Commerce has threatened to sue the FTC over this rule.

The Connecticut Business and Industry Association signed onto a coalition letter from the Chamber of Commerce, asking members of Congress to “rein in” the FTC’s rule making. The business groups argued the agency is acting outside its authority and circumventing Congress.

“The FTC’s blanket ban on non-compete clauses is vastly overbroad and likely will harm both employees and employers. Courts, scholars, and economists all have found that non-compete clauses, when properly used, encourage investment in employees and help to protect intellectual property,” the letter reads.

“To be sure, courts do not and should not enforce unreasonably restrictive non-compete clauses, but therein lies the wisdom of our current system: reasonable, pro-competitive non-competes stand, whereas unreasonable, anti-competitive ones fall,” the letter continues.

Those groups cited Murphy as part of their argument because of his legislation, but he said he is “confident” the FTC has the authority to implement such a rule even though he believes such reforms would be better coming from Congress. And while he supports all efforts on the issue, Murphy said he wants to see limits to non-competes at the national level.

“I think given how many different state laws there are and given that the hiring markets today are truly national, it just makes sense for our economy to have one rule,” Murphy said. “There are some areas of our economy where it makes sense to have state experimentation. I’m not sure this is one of them.”

CT Mirror staff writer Erica E. Phillips contributed to this report.

The Connecticut Mirror/Connecticut Public Radio federal policy reporter position is made possible, in part, by funding from the Robert and Margaret Patricelli Family Foundation and Engage CT.

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