Regulatory Developments to Watch: Non Competes and ERISA

Though perhaps not top of the agenda for boards of directors in 2023, there have been significant developments in two unrelated but important areas that boards should be mindful of heading into 2024—the increasing efforts to eliminate (or at least weaken) employee non-competition restrictions and regulatory developments in the ERISA pension plan fiduciary space.

Non-Competes

2023 saw a surge in significant developments restricting non-compete agreements and other restrictive covenants, both from federal agencies and state legislatures. Many of these developments are still unfolding and the trend toward restriction is likely to continue throughout 2024.

FTC Rule Proposal

In early 2023, the Federal Trade Commission (FTC) proposed a rule that would ban employers from entering into any non-competes with workers, as well as agreements that “have the effect of prohibiting the worker from seeking or accepting employment.”[1] The rule would also require employers to rescind all existing non-competes by written notice. The sole exception would be for sale of business agreements, where the employee restricted by the non-compete owned at least 25% of the business sold.[2] The vote on this rule has been postponed until April 2024 at the earliest, and it is expected that there will be several legal challenges to the rule if it is adopted.

NLRB Enforcement

In May 2023, the General Counsel to the National Labor Relations Board (the NLRB), Jennifer A. Abruzzo, issued a memorandum stating that most non-compete agreements violate the National Labor Relations Act (the Act).[3] Although the memo is not binding on the NLRB, General Counsel Abruzzo directed the NLRB’s regional offices to investigate employers using non-competes to determine whether their usage is “overbroad”.  While it was a striking action by the General Counsel, since the issuance of the memo, we have seen only one reported complaint filed, by the NLRB’s Cincinnati Regional Office, charging that an employer’s use of restrictive covenants which applied to employees constituted unfair labor practices.[4]

State Developments

Also in May, 2023, Minnesota became the 4th U.S. state to ban all employee non-competes (joining California, North Dakota and Oklahoma), with a new law that went into effect on July 1, 2023.[5] The law bans all agreements that impose post-termination restrictions on employees from performing work (i) for another employer for a specified period; (ii) in a specified geographical area; or (iii) for another employer in a capacity that is similar to the employee’s work for the employer that is a party to the agreement.[6] While the law is not retroactive and does not affect other employee restrictions, such as confidentiality and non-solicitation covenants, it does bar employers from utilizing choice-of-law or choice-of-venue clauses in agreements with Minnesota employees and independent contractors in an attempt to use a more favorable state’s law as a workaround.

New York threatened to follow suit when, in June 2023, its State legislature passed a bill banning all non-competes entered into on or after 30 days following the bill’s enactment, including those entered into by employees or in connection with the sale of a business.[7] The bill would have covered any person who performs work or services for another person where the individual is in a position of economic dependence on that other person.[8] Governor Kathy Hochul has since vetoed the bill, but has made statements to reporters indicating her preference for finding a compromise that would ban non-competes for those earning less than $250,000 per year.[9]

Finally, notwithstanding the fact that California was one of the early adopters of a total ban on non-competes,[10] Governor Gavin Newsom signed into law two new bills, Senate Bill 699 (SB 699) and Assembly Bill 1076 (AB 1076), in September and October of 2023 respectively, strengthening the protections of California’s existing statutory prohibitions. Both went into effect on January 1, 2024. Under SB 699, prohibited non-competes are void “regardless of where and when the contract was signed,” and employees (current, former, and potential) can bring private actions for injunctive relief, actual damages and reasonable attorney’s fees and costs. AB 1076 requires employers to issue notice to all current and former employees employed after January 1, 2022 and subject to a non-compete in violation of California’s prohibition that their restrictions are void, by February 14, 2024.

Next Steps

Employers should catalog where employees are located and be prepared to track both current and former employee mobility to ensure they remain in compliance, determine whether any employees in California should receive the required notice by February, review and revise form agreements for any potentially void non-compete clauses, and continue to monitor these and other developments over the coming year.

The DOL’s Continued Regulatory Initiatives: A New Fiduciary Rule, Proposed QPAM Amendments and ESG-Related Guidance

The Department of Labor (the DOL) has had another active year – a trend we predict will continue into 2024. This high-level overview of a few notable DOL regulatory initiatives from 2023 should be useful for board and management teams alike.

The DOL’s Proposed Amendment to the Definition of an Investment Advice Fiduciary

In October of 2023, the DOL proposed a new rule (the Proposed Rule) that would redefine who constitutes an “investment advice” fiduciary under the Employee Retirement Income Security Act of 1974, as amended (ERISA).[11] The DOL intends many of the proposed changes to ensure that rollover recommendations provided to participants and beneficiaries of 401(k) plans and individual retirement accounts fall under the umbrella of fiduciary “investment advice.” However, the changes ushered in by the Proposed Rule are much broader in scope and do not include any exclusions or safe harbors. If the Proposed Rule is finalized as currently formulated, companies sponsoring ERISA plans and a wide variety of service providers and financial institutions will need to determine which actions (including regular marketing and sales activities) could be deemed to be fiduciary “investment advice” going forward.

The Proposed Rule is subject to a 60-day notice and comment period. Public hearings took place in early December and written comments were due to the DOL on January 2, 2024.  Many industry groups, financial institutions, investment advisers and organizations representing ERISA plans and plan sponsors have submitted comment letters to the DOL. Given that no final rule has yet been adopted, no immediate action is required at this time. However, if the Proposed Rule is finalized, companies sponsoring ERISA plans and financial institutions providing services to ERISA plans should consider surveying the impact on existing arrangements and whether changes will be needed to manage the risks associated with fiduciary status under the more expansive rule.

The DOL’s Proposed Amendment to the QPAM Exemption

Companies sponsoring ERISA plans and service providers to such plans frequently rely on Prohibited Transaction Exemption 84-14, as amended (the QPAM Exemption). As summarized in our Selected Issues for Boards of Directors for 2023, the DOL proposed material changes to the QPAM Exemption in July of 2022 that would impact the ability of plan sponsor and service providers alike to rely on the QPAM Exemption.[12] The DOL received hundreds of comments and held several days of public hearings on the proposed amendments. Despite vocal criticism regarding the proposed amendments, it is widely anticipated that the DOL will seek to finalize the amendments to the QPAM Exemption.

Depending on the substance of the final amendments, we may see less reliance on the QPAM Exemption across a broad range of transactions, which could have a chilling effect on the willingness of service providers to enter into contracts with ERISA plans. Compliance with the amended QPAM Exemption is likely to be costly to plan sponsors and service providers alike, and the increased risk and cost of relying on the QPAM Exemption could result in financial institutions and asset managers charging ERISA plans higher fees for investment management services and financial transactions.

The DOL’s ESG Guidance

In November of 2022, the DOL released its final rule (the Final Rule) clarifying the application of ERISA’s fiduciary duties to the selection of investments and investment courses of action.[13] The Final Rule reaffirms a bedrock principle under ERISA’s duties of prudence and loyalty – when selecting investments and/or investment courses of action, plan fiduciaries must focus on the relevant risk-return factors and may not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan (e.g., by reducing investment returns and/or increasing investment risks).

In September 2023, the DOL released a new Advisory Opinion addressing the retention of diverse managers by ERISA plans sponsored by the financial institution; in connection with the retention of these managers, the financial institution is expected to pay all or part of the investment management fees otherwise payable by the ERISA plans.[14] The retention of diverse managers by the ERISA plans is part of the financial institution’s broader strategic initiative to address social issues, including the underrepresentation of diverse managers in the asset management space.[15] The DOL addressed the question of whether the investment committees for the ERISA plans could consider the reduced management fees associated with the diverse managers in connection with its selection process. The DOL concluded that, while it would be inconsistent with ERISA for the investment committees to exercise their fiduciary duties to select investment managers that further the financial institution’s public policy goals, an analysis of the fees payable by the ERISA plans for investment management services would be a relevant factor to consider in connection with a prudent selection process.

This Advisory Opinion, which garnered headlines, may result in increased questions around ESG-focused investments or, in the case of 401(k) plans, pressure to make ESG-focused investment options available to plan participants. ERISA plan fiduciaries continue to be bound by ERISA’s duties of prudence and loyalty and this Advisory Opinion does not materially change the legal landscape regarding when and how ESG-related factors can be incorporated into a prudent selection process.

Next Steps

ERISA plan sponsors, fiduciaries, and service providers should continue to monitor these and other DOL initiatives over the coming year.

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[1] § 910.1(b)(2). For a summary of the FTC’s proposed rule, see our January 2023 alert memo available here.

[2] § 910.3.

[3] Non-Compete Agreements that Violate the National Labor Relations Act, Memorandum GC 23-08 (May 30, 2023).

[4] NLRB Office of Public Affairs, “Region 9-Cincinnati Issues Complaint Alleging Unlawful Non-Compete and Training Repayment Agreement Provisions (TRAPs)” (September 7, 2023), available here.

[5] See our June blog post for our summary of the Minnesota law, available here.

[6] Minn. Stat. § 181.988.

[7] See our June alert memo for our summary of the New York bill, available here.

[8] New York State Senate Bill S3100A.

[9] See our December alert memo for our summary of the Governor’s statements, available here.

[10] California Business and Professions Code § 16600.

[11] See our November alert memo for a summary of the Proposed Rule, available here.

[12] See 87 Fed. Reg. 73866 (December 1, 2022); see also our January 2023 publication, Selected Issues for Boards of Directors 2023 for a summary of the proposed amendments to the QPAM Exemption, available here.

[13] See our December 2022 alert memo for a summary of the final rule, available here.

[14] See DOL Advisory Opinion 2023-01A (AO 2023-01A), available here. 

[15] See AO 2023-01A, which describes the program as “a comprehensive approach to increasing investment in Black-owned business, advancing racial equity practices in the financial services industry, providing greater access to banking and credit in communities of color, and expanding home ownership among Black Americans.” AO 2023-01A states that “diverse managers” are those with minority/female ownership of a specified percentage as measured by a third party database.