The Federal Trade Commission (“FTC”) has announced a new rule that, with a few exceptions, bans non-compete agreements in the employment area. Some commentators reacted with shock and horror. Others predicted that the rule will be struck down as beyond the agency’s authority. The situation is more complicated than a single agency’s rule, though.
Non-compete agreements, which restrict when and how employees can change jobs, have become more and more common. Once confined to founders and key employees, these agreements have spread to middle managers and even entry level workers.
The FTC says that 18% of the workforce, or 30 million people, are covered by non-compete agreements. But the numbers could be far higher. A 2019 study by the Economic Policy Institute at Cornell University estimated that 27% to 47% of private sector workers, between 36 – 60 million people, are subject to some form of non-compete agreement.
Whether or not the FTC overstepped its authority, organizations should be aware that the landscape is changing. Non-compete agreements are likely to come under increasing scrutiny. To stay ahead of the curve, it’s time to consider the alternatives to non-compete agreements.
On April 23, 2024, the FTC issued a final rule, 16 C.F.R. Part 910 barring new non-compete agreements as an “unfair method of competition,” with exceptions relating to the sale of a business. Existing non-competes remain valid only for “senior executives” with salaries above $151,000 per year who are in “policy making“ positions.
Federal scrutiny goes beyond the FTC. According to the law firm DLA Piper, other federal agencies – including the Department of Justice Antitrust Division and the National Labor Relations Board – have also been challenging non-compete agreements.
And, in 2023, bi-partisan bills addressing non-compete agreements were introduced in the House and Senate: The Workforce Mobility Act (similar to the FTC rule) and the Freedom to Compete Act (exempting low wage workers from non-compete agreements).
States have been hostile to non-compete agreements since the days of “rugged individualism” in the 19th Century. California barred non-compete agreements in 1872, for example.
A total of five states have barred most non-compete agreements: California, Colorado, Oklahoma, North Dakota, and Minnesota. Other states subject non-compete agreements to judicial review.
Instead of restricting the ability to change jobs, organizations may instead focus on protecting confidential information and trade secrets. Courts (and legislatures) are much more likely to enforce an employer’s right to protect its intellectual property than to restrict employment. And effective protections do exist.
Confidentiality and non-disclosure agreements (NDA). The most straightforward way to protect an organization’s confidential information, processes, and other “know-how” is through confidentiality and non-disclosure agreements. The terms are mostly interchangeable. These agreements can be part of an employment contract or stand-alone documents.
Confidentiality and non-disclosure agreements protect a wide range of materials including financial plans, marketing strategies, technical data, customer lists, and much more. The information to be protected simply must have economic value and not be generally known.
Non-solicitation and non-circumvention agreements. These agreements restrict employees (or others) from doing business with an organization’s clients, prospects, and so forth. They are most often used when businesses are exploring a joint venture and want to avoid being “cut out of the deal.” They are also used to limit former employees from doing business with an organization’s customers, suppliers, and others.
Because these agreements restrain business, they are subject to greater scrutiny. To be enforceable, they should include reasonable limits on duration, geography, industries covered, and the like.
The landscape is changing in the world of non-compete agreements. Forward looking organizations should focus more on non-solicitation and NDA agreements instead.
TEP.Global not only has a combined 100 years of experience and expertise in people management, talent acquisition, executive assessment, but also deep knowledge in talent management, talent retention, and workplace culture in organizations of all sizes. For more information and insights, please contact us.
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