DISCLAIMER: This post contains general information about the FTC ban and non-competition agreements. It is not legal advice. If you are using non-compete agreements in your business, we strongly recommend you schedule a consultation with an employment attorney in each of the US jurisdictions where you operate.
The Federal Trade Commission (FTC) ban on non-competition clauses, or “non-compete agreements,” should not come as a surprise to most business owners. The FTC and other government agencies have long known that non-competition clauses were overly-broad and unnecessary for many types of workers. You probably knew that, too.
Non-competition clauses can:
- Deter employees from leaving unsupportive or incompatible employers
- Suppress competition for employees and employee wages
- Hinder personal and professional growth
- Stifle entrepreneurship and business innovation
- Keep departing employees from contributing to the economy
- Rob the marketplace of needed workers
- Increase unemployment insurance (UI) claims
- Encourage workers to participate in shadow economies
- Lead to lawsuits that add to court backlogs
An estimated 30 million American workers are bound by non-competition agreements. One hundred twenty days after the new rule is published in the federal register, many will be free from them. In a future post, we will address who might still be bound by them. For now, here’s an overview of what the FTC ban means for most employers in New York.
The FTC Wasn’t the First to Restrict Non-Competes
Some media outlets claim a significant shift has occurred in the employment landscape due to the FTC ban. As an employment law and mediation firm, we’re not so sure. In New York State (NYS), non-compete clauses are already limited. To enforce them, employers have to prove the clauses:
- Are necessary to protect legitimate business interests. For example, pharmaceutical employers might be able to bind key researchers to non-competition clauses in their employment contracts. However, New York courts would probably interpret the limitations narrowly.
- Do not impose an undue hardship on the employee. In this hypothetical situation, if one of the key researchers is relocating out-of-state with a spouse, enforcing the non-compete provision might impose an undue hardship.
- Do not harm the public. The law is frequently interpreted in ways intended to protect the general public. If society might miss out on groundbreaking research because of a contractual obligation, the courts will usually decide in a manner most likely to further the research.
- Are reasonably limited in time and geography. An employer might be able to restrict an employee from opening a competing laboratory in the same city, county, or state, but prohibiting competition “throughout the world” is likely too broad. Similarly, a six-month limitation might be upheld, but five to 10 years probably won’t.
Before the FTC ban, NYS courts might not invalidate agreements entirely. They typically removed the portions they found unreasonable or revised them to reduce the applicable time period or geographic area. Going forward, it appears they will be entirely unenforceable.
Distinguishing Non-Competition and Confidentiality Provisions
Employers often have employees sign one agreement that includes provisions for:
- Non-Competition
- Confidentiality
- Non-Disclosure
This can add to confusion about what the FTC has banned. It has not banned confidentiality and non-disclosure agreements (NDA). In most cases, you can still prohibit your employees from using your intellectual property (IP) to compete with you.
Benefits for Employers
The ban is not all doom and gloom for employers. As with most changes, we decide whether to look for the opportunities and take advantage of them or to be left behind while we wish they weren’t happening. Here are a few opportunities we see:
- A Deeper Talent Pool. Without non-competition clauses, employers have access to more job candidates for critical roles.
- More Innovation. Employees who are free to choose continued employment often do so because they feel trusted and valued. The relationship is mutually beneficial, so they are more likely to invest in the stability and future of their employers.
- Greater Stability. It will take time to transform your workplace, and we anticipate a wave of employees moving to new employers soon after the ban takes effect. However, as you build employment as a partnership, we predict you will see greater commitment among your remaining employees.
Challenges for Employers
All opportunities also come with challenges. Here are some you must navigate with this regulatory change:
- Protecting Business Interests. You can still use confidentiality and NDAs to safeguard proprietary information and keep employees from using it to compete with you.
- Updating Employee Policies. We have already been busy helping our clients prepare for new rules, such as the FTC ban. Understandably, no unplanned legal expense is ever desired, but the cost of the updates probably won’t be as high as you think.
- Managing Transitions. You might be imagining a chaotic wave of resignations and hiring, but remember that changing jobs has a cost to employees, too. Of course, preparing for potential staff turnover is wise, but you have presumably already developed processes to ensure knowledge is transferred and high quality services continue. Now is the time to put those processes to the test.
Next Steps
The United States Chamber of Commerce plans to file a lawsuit challenging the FTC ban, arguing that states should be the ones regulating non-competition agreements as they deem necessary. We also expect there to be challenges to the application of the FTC rule to independent contractors. Regardless of the outcomes of such lawsuits, employers must continue to retain employees through mutuality, trust, and respect. Those are generally more binding than contracts anyway.
Need to update your employee policies?
Why Your Employee Handbook Isn’t Enough for Today’s Workplaces