Employers, make no mistake, the federal government and state governments are targeting employee non-competition agreements, also called non-competes. Broadly, legislatures and government agencies are concerned employers are using such agreements as standard practice in many industries and impairing employees’ ability to change positions and earn more.
At the federal level, the Federal Trade Commission (“FTC”) recently introduced a controversial Proposed Rule that will effectively ban most employee non-competes and, separate from the Proposed Rule, took enforcement action to challenge employers’ use of non-competes for certain lower level employees. At the state level, legislators and regulators are also taking aim at limiting or banning non-compete agreements.
What is a Non-Compete?
A non-compete is a type of restrictive covenant that typically prevents employees from working for a competitor in a defined geographic area for a defined period of time after their employment ends. Often, non-competes are used in conjunction with other types of restrictive covenants that limit employees’ post-employment activities, such as restrictions on solicitation of clients, solicitation of other employees, and use of confidential information.
Non-competes and other types of restrictive covenants are properly used, where enforceable, to protect legitimate interests of employers, but must be narrowly tailored so as not to place an unreasonable burden on the employee. Many states have specific conditions that must be met for a restrictive covenant to be enforceable. Non-compete agreements can be abused if the terms are overly broad and especially when applied to employees who are not in position to hurt an employer by working for a competitor. The enforceability of non-competes is currently a matter of state law and varies widely by state.
What is the FTC’s Proposed Rule?
The FTC’s Proposed Rule seeks to block most employee non-competes and related restrictive covenants that are so restrictive they are functionally non-competes. There is no doubt that the FTC’s Proposed Rule will be met with significant opposition from industry and, even if it were adopted, it will face significant challenges as to whether the FTC even has authority to adopt such a rule that impairs existing contracts and supersedes state laws. Nonetheless, employers should expect the FTC will try to take some action to curtail the use of non-competes. At a minimum, employers should expect the FTC to try to prevent them from imposing the kinds of non-competes that are likely to be unenforceable under most state laws as they exist now, for example, requiring low-level workers to sign non-competes when there is no damage to the business if they leave to work for a competitor.
The FTC’s Proposed Rule is not immediately effective and is currently at a stage seeking public comment. Any such rules is at least eight months away from taking effect and likely longer.
Businesses should note that the FTC’s Proposed Rule and many other efforts to curtail non-competes do not apply to restrictive covenants in connection with some sale of businesses.
What can we learn from the FTC’s recent enforcement efforts?
The FTC is targeting employers that are imposing restrictive covenants that burden employees in a way the FTC asserts is unreasonable based on the position and role of the employees. In short, the FTC is taking action against employers it alleges require employees to sign non-competes even when the employers do not have a protectable interest. The FTC asserts these over-reaching agreements chill competition and are not enforceable.
When evaluating this issue, employers should ask themselves if allowing a former employee in a given position to work for a competitor harms the employer in a unique way that the employer would not otherwise be harmed if the former employee quit to travel the world and the competitor hired some other equally talented employee. In the “travel the world” hypothetical, the business would be harmed for sure because it lost talent and its competitor has capacity, but that is not a protectible interest in and of itself.
The employer should be able to articulate how an employee going to work for a competitor would be uniquely damaging to the company because of the employee’s former affiliation with the company (e.g., a sale person whose relationships were built with company support and whose relationships will walk out the door with the employee).
What is happening at the state level?
In addition to the FTC, many states are looking to adopt measures to reform the use of non-competes. This looks very different in different states. For example, California already bars most non-competes (and non-solicitations) and Illinois, Nevada, Oregon, Oklahoma, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, Virginia, the District of Columbia, and Washington state have all enacted noncompete restrictions in recent years. In New Jersey, a bill to limit the use of non-competes is working its way through the legislature, which, if enacted, would, among other things, require pay for employees during a period of restriction and prohibit use of non-competes for broad categories of employees.
Ultimately, if the FTC’s Proposed Rule does not proceed, employers will continue to face a patchwork of state laws with which they must comply based on the states in which they have employees.
Savvy Employer Takeaway:
Employers should carefully tailor the use of non-competes and other restrictive covenants, where they are enforceable, to ensure their agreements are protecting legitimate interests. Employers should be very cautious before imposing such restrictions on lower wage workers. Finally, employers should look for other ways to protect their interests, including limiting access to confidential information and designing compensation models that incentivize retention.
Flaster Greenberg is on top of this developing issue. Stay tuned for a follow up post next week addressing additional questions, and of course, contact Flaster Greenberg for more information or if you need clarification for your business.