This week the Federal Trade Commission upended the world of employment law by passing a final rule banning almost all non-compete agreements for employees and independent contractors. Employees must be informed that their existing non-compete agreements are no longer valid. Existing non-competes for senior executives remain in effect. Non-competes remain legal as part of a contract for the sale of a business, i.e., a seller of a business can be required not to compete with the business they just sold. Business groups cried foul, and the United States Chamber of Commerce and others immediately filed suit to stop the new rule.
A non-compete is a contract, generally forced on employees as a condition of employment, that prohibits the employee from working for a competitor, or in the same field as the employer, for one or two years after the employee leaves the employer. The justification for these restrictions is to prevent workers from jumping ship and taking business secrets, clients, customers, and vendors to a competing business. The FTC said the restrictions are an unreasonable restraint of trade, which limit worker mobility and reduce wages and economic growth. Many states have already restricted the scope of allowable non-competes in recent years.
The truth is, even with the new rule, employers have ample methods for protecting their legitimate business concerns. The rule does not prohibit the continued use of “non-solicitation” agreements, which prohibit employees from soliciting clients, customers, vendors, and employees of the former employer once they leave. The rule also does nothing to restrict the application of various “trade secrets” laws, which provide tough penalties on those who take proprietary, confidential business information and give it to competitors. Those tools provide businesses with more than enough protection from the actual harm that can result from employees leaving to go and work for a competitor.
What the new rule does do is it takes away an unfair tactic used by some employers. Until now, employers have been able to force employees to sign broad non-competes. The courts (depending on the state) may not be willing to enforce overly broad non-complete restrictions (a vague legal standard). But, just the threat of costly litigation is often enough to keep employees from leaving or to force those who do leave to leave their profession for the restrictive period just to avoid litigation. This threat forces employees to stay in jobs they don’t want or to accept lower paid or lower status jobs, which can affect their career trajectory forever. The rule will end the ability to hang litigation over the heads of employees who have done nothing wrong. In that respect, the rule puts greater fairness into the labor market.
So, will anything change? Probably not anytime soon. While the rule is set to go into effect in four months, business groups will sue in friendly courts and are likely to find at least one willing to suspend the rule pending further litigation. The U.S. Supreme Court is likely to overturn the doctrine of “Chevron deference,” which has allowed administrative agencies to engage in rulemaking beyond the strict parameters of their authorizing statutes. Depending on what rule replaces Chevron, there could be a strong follow-on argument that the FTC is exceeding its authority in issuing this new rule.
On a more practical level, however, what should employers do? Put into place reasonable non-solicitation and proprietary rights agreements. Conduct proper exit interviews to ensure departing employees are not taking company secrets with them when they leave. Learn to live without unduly broad non-competes. The fact is, even if this rule is eventually overturned or weakened, the days of non-competes have long been numbered. States continue to restrict them because businesses have gone too far in the restrictions. They are not good practical enforcement mechanisms.
What about employees? Well, this is still good news. Celebrate, but don’t plan that job change just yet. Wait to see how the dust settles.
If you are an employee wishing to have an existing non-compete reviewed given the new legal environment, or you are a small business employer who would like to get ahead of the curve by re-writing the non-competes you have been using, call us. We are ready to help you navigate these new and turbulent waters.
