Two trailer park employees go round the outside, round the outside…
Guess who’s back? Shady’s back—and by that, we mean the legality over non-compete agreements. Recently, the Federal Trade Commission put out a press release notifying everyone of a new proposed rule that would effectively ban noncompete clauses and could potentially raise employee wages by $300B (that’s billion, with a “B”). We weigh in on the potential consequences of the rule and discuss several alterative approaches employers should consider if the rule moves forward.
But first—what’s the big deal?
Non-Competes In General
Broadly: a non-compete agreement is a legally binding contract in which an individual agrees not to work for a competing company or start their own business in the same industry or market for a certain period of time after their employment ends. Employers use them under the guise that they are protecting their legitimate, competitive interests; Employees generally disfavor (read: despise) them because they hinder that employee’s ability to do a job they are trained to do.
In practice, we’ve seen the gamut—between advising an employer on whether a non-compete agreement is or isn’t conducive to whatever goals the employer is trying to achieve, to advising employers on what steps they can take to improve the chances that the non-compete will be enforceable in the future (which is often unlikely, as courts generally do not favor these agreements), to advising employees who have signed a non-compete as to what their options may be. It’s a mixed bag, heavily dependent on the facts.
The heart of the issue, and the position the FTC has taken, is that non-compete agreements restrict an individual’s ability to work and potentially earn a living, which is an anti-competitive, exploitative practice and one that usually involves unequal bargaining positions as between the employer and the employee.
If you are an employer considering using non-compete agreements or an employee who has been asked to sign one, it is important to understand the potential consequences and alternatives—especially if the FTC rule moves forward and non-competes become an illegal restraint on trade.
1. NDAs and Non-Solicitation Agreement. The FTC’s proposed rule calls out that the definition of a non-compete clause (or agreement) “would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (‘NDAs’) and client or customer non-solicitation agreements.”
One alternative to a non-compete agreement might be a non-solicitation agreement. This type of agreement prohibits an individual from soliciting clients or employees of the company after their employment ends, but does not restrict their ability to work for a competitor.
Another alternative is a confidentiality or non-disclosure agreement. This type of agreement prohibits an individual from disclosing confidential information, such as trade secrets or intellectual property, to third parties. Confidentiality agreements can protect a company’s proprietary information without restricting an individual’s ability to work.
2. Garden Leaves Policies and Severance Packages. One additional consideration is using a garden leave clause in an employment contract or implementing a garden leave policy into an employer’s handbook. A garden leave clause allows an employer to require an employee to take a period of paid leave before starting a new job with a competitor. This can give the employer time to find a replacement and minimize disruption to the business, while still allowing the employee to move on to a new job. Additionally—a severance package in exchange for the employee agreeing not to work for a competitor may also be a possibility. Both of these alternatives require more out-of-pocket money from the employer—but the added consideration paid to the employee goes a long way in terms of enforcing a promise not to work for a competitor.
Ultimately, the best approach will depend on the specific needs and circumstances of the employer and the employee.
Now This Looks Like a Job For Me….
Are you an employer who is concerned over the effect this FTC rule may have over your existing agreements? Are you looking for advice and counsel on alternative approaches? Or perhaps you’re employee and you’re looking for guidance on what you can and can’t do under your existing non-compete—here’s a concept that works: reach out and contact us. Use this Contact Us form to tell us how we can assist you, or call 855-473-8474.