Non-compete agreements, or noncompetes, have been a hot-button issue in employment law in the last few years. Now the Federal Trade Commission has banned them, with its commissioner, Lina M. Kahn, saying that the ban will allow the creation of about 8,500 new businesses a year, plus give workers the freedom to pursue jobs and bring their ideas to market. The FTC says that about 30 million Americans are working under a noncompete.
2 Types of Employees Who Might Need a Noncompete
- Those who are privy to trade secrets and sensitive information.
- Those who deal with clients and have access to client information.
The ruling will take effect 120 days after it is published in the Federal Register, according to the FTC. That may or may not happen, as the U.S. Chamber of Commerce plans to sue the FTC, calling the ban an “unlawful power grab.”
But what exactly is a non-compete agreement? Are they even necessary for employers? This article will detail what non-compete agreements do and what kind of companies might have legitimate reasons to enforce them, if indeed the ban does not take place.
We’ll also detail when employees should sign a non-compete agreement and situations where enforcing a non-compete agreement may not be the best idea for an employer.
What Are Non-Compete Agreements?
A non-compete agreement is a legal contract between an employer and an employee that prevents the employee from competing with the employer after they leave or are laid off from the company. This is done by restricting the employment activities of the employee for a certain period of time and within a certain geographical area.
The length and scope of a non-compete agreement can vary depending on the nature of the employment, but a typical non-compete agreement will last roughly six months to a year and be relegated to the area in which the employer directly does business, such as their headquarters or office.
There is no set standard for non-compete agreements and the kind of employment activities restricted differ from one non-compete agreement to the other. Most non-compete agreements will prevent an employee from working for a business that competes with their former employer; the specific types of businesses (or company names) are typically outlined in the non-compete agreement.
Non-compete agreements can also keep an employee from starting a competing business of their own or developing a product that would compete with that of their former employer. In non-compete agreements where joining or starting a competing business is allowed, the employee may instead be restricted from recruiting or encouraging coworkers and associates to join them; this is known as a non-solicitation agreement.
If an employee violates a non-compete agreement, they can be held liable for damages (most often related to lost profits) or have an injunction filed against them to halt their competing activities. In the most extreme cases, they may even face civil penalties.
Conversely, an employee can challenge a non-compete agreement they have breached if they believe it is unreasonably strict. If a court finds a non-compete agreement unreasonable, it may void it entirely or direct the company to modify it to comply with state laws.
What Type of Employers Need Noncompetes?
Although any employer can create a non-compete agreement (so long as they are recognized in the state they operate in), some employers have more pertinent reasons to enforce one than others. Businesses with trade secrets, including intellectual property relating to new products, inventions, and projects or other types of highly confidential information, have a vested interest in keeping that information out of the hands of their competition.
Enforcing a non-compete agreement on an employee who handled or was around sensitive information can keep the employer’s trade secrets safe for a reasonable period of time.
Employers whose employees maintain clients for the company also have reason to enforce non-compete agreements. In this way, the employer can make sure the employee does not immediately take these clients with them to a competing business.
Employers that don’t retain clients or deal with sensitive information may still have credible reasons to create a non-compete agreement. For instance, when a business is sold, the new owner may impose a non-compete agreement on the seller. Otherwise, the seller could start a new business in direct competition with their old one.
When to Use a Non-Compete Agreement
As we’ve established, non-compete agreements are best reserved for employees who deal with classified information related to an employer or their products and employees who maintain high-value clients for their employer that they could take with them should they leave. Non-compete agreements should either be created on an individual basis or established for specific roles where business interests are at stake.
Employees are under no legal obligation to sign a non-compete agreement, no matter the nature of their position. Many employees will sign a non-employment agreement, simply out of fear that not doing so will cost them their employment. But the only time signing a non-compete agreement is in an employee’s best interest is when there is compensation for doing so; this could include a severance package, stock options or other types of benefits.
Then, and only then, do employers and employees mutually benefit from a non-compete agreement. Employers wishing to create a non-compete agreement that their employees will agree to should consider offering a form of compensation in return for compliance.
When Not to Use a Non-Compete Agreement
Sometimes, creating and enforcing a non-compete agreement may seem like the best course of action, but is perhaps not. For instance, some retail outlets and fast-food chains enforce non-compete agreements on wage employees, ostensibly to prevent the leaking of any trade secrets. Not only does this severely limit the number of work opportunities for non-college-educated workers, it has little grounding in reality, as employees at this level do not handle sensitive information related to these company’s products.
In fact, non-compete agreements for any sort of low-level position, such as secretarial or janitorial work, are considered to be outside the scope of legitimate business interests and are almost never enforced.
There are also situations where the enforcement of a non-compete agreement may affect the health and safety of the public. For instance, employers in the medical and scientific fields may believe enforcing a non-compete agreement for a particularly skilled employee is in their best interest. However, in doing so, they would limit that employee’s ability to perform necessary medical or scientific procedures in situations such as medical emergencies. In such a case, a non-compete agreement would likely be found unenforceable for the sake of the wider community.
Finally, employers should refrain from placing a non-compete agreement on an area of business they are exiting or have no interest in; an employee who works as a software engineer for a law firm should not be prevented from taking a similar position at a video game company.
Non-compete agreements are trickier to navigate than most employers assume and should be handled carefully. A non-compete agreement that is found to be unreasonable and unenforceable is actively harmful to an employer, as they will have to deal with the legal fallout and subsequent fees.
Before creating a non-compete agreement, ensure that it is in service of legitimate business interests, its restrictions are reasonable and some form of compensation for the employee is provided.
If the ban takes place, this info may be null and void. If the U.S. Chamber prevails in its lawsuit, it may stand. Meanwhile, businesses would do well to think carefully about noncompetes and what kind of employees should sign them.
