Every employer’s worst nightmare is losing intellectual property or trade knowledge to their competitors. For years, a noncompete clause served to keep proprietary knowledge from leaking to competitors. But now, all of that may change after an FTC proposal to ban this practice.
There are many arguments for and against noncompete agreements. But the consensus, especially by employees, is that they limit employment opportunities without good reason. The law is coming down on their side, and we will see massive changes as a result.
In this guide, we will discuss noncompete clauses in contracts. Here, you can learn how potential FTC rules to ban them could affect you.
What Is a Noncompete Clause?
A noncompete clause, or non-compete agreement, is a special contract. This is a contract between the employee and employer. A noncompete prevents that employee from working with any direct or indirect competitors.
No two non-competes are the same. But they prohibit working for a competitor during or after one’s employment at the company. Even if the employee terminates their employment, the noncompete still applies for the contracted period.
Here is a noncompete clause sample of what it may include:
- A date that establishes when the agreement begins
- A justified reason for making the agreement
- A window during which the employee cannot work for competitors
- Some form of compensation if the employee obeys the terms (optional)
To be clear, not all noncompete agreements include remuneration. Even then, the remuneration may not be sufficient.
Which Industries Use Noncompetes?
Noncompetes affect a wide range of industries. These can be high-level employees such as engineers and executives. But it can also affect smaller-scale jobs such as hairstylists and workers in a warehouse.
Often, employees do not have a choice in signing a noncompete. If they fail to sign it, then the employer simply will not hire them. Employees who refuse to sign noncompetes rob themselves of many valuable opportunities.
Arguments Against Noncompete Clauses
Many employees find a noncompete to be unfair, unethical, and exploitative. Even in the event of remuneration, it can make obtaining new work difficult. It enables predatory businesses to keep a tight rein on employees, past and present.
Noncompetes can also prevent an employee from beginning their own business. Others suggest that it reduces industry innovation and is a tactic for suppressing wages.
There are also significant legal issues if an employee breaches the contract. This can lead to lengthy legal battles between a company and its former employee. It can introduce significant financial strain if an employee must pay legal fees to defend themselves.
Are Noncompetes Enforceable?
While many may view noncompetes as unethical and questionable, there is some good news. Just because an employee breaks their noncompete does not mean they are in peril of consequences. A court will decide whether to uphold noncompete clauses depending on the situation.
There are a few criteria that courts usually use to assess noncompetes:
- If the clause is reasonable
- If the business has a legitimate protectable interest
- If the noncompete makes it impossible for the employee to make a living
- How long the terms of the noncompete run for
- If the clause prevents employees from doing work unrelated to that specified in the contract
- If the employer benefits by having the noncompete, at the employee’s expense
- If the compensation is not worthwhile
In many cases, a court will throw out a noncompete. This is usually because the terms are unreasonable, or there is insufficient compensation. Clauses that include no compensation usually get immediate dismissal.
One could say that the advantage is with the employee. The employer does need to provide good reason and compensation, and not restrict the employee’s opportunities. However, a noncompete is often used against employees.
The FTC Proposal to Rule out Noncompete Agreements
For the very reasons above, the FTC is coming down against noncompete clauses. They claim that they violate Section 5. This section of the Federal Trade Commission Act allows individuals to freely change jobs.
Noncompetes, therefore, limit an individual’s opportunities.
The core of the argument is that employees are losing billions in wages per year. They estimate that these noncompete affects at least 30 million Americans and cost them approximately $30 billion in wages.
The FTC proposal would ban most new noncompete agreements and nullify most existing ones. Noncompetes, after this ruling, may only exist in a small percentage of situations.
However, this ruling is strictly for noncompete agreements. It does not cover things like nondisclosure agreements. All of this follows legal precedent after dozens of cases of oppressive noncompetes being used against employees.
How Does This Affect You?
As an employee, this is particularly good news. Anyone who has worked in an industry where noncompetes are standard knows how oppressive these contracts can be. There are very few situations where noncompetes truly benefit employees.
As employers, this means many businesses will have to adapt. Since they cannot prevent employees from working elsewhere, the onus is on them to retain their employees. We may see employee wages and benefits become more enticing to retain them for longer.
Do keep in mind that this ruling is not yet official. At the time of writing, the FTC seeks broad public comment. Depending on the response, we may or may not see this rule come to fruition.
Seek Legal Advice from McOmber McOmber & Luber
For decades, the noncompete clause was a bludgeon that employers used to control intellectual property and skilled labor. Thanks to the FTC ruling against them, it may soon be illegal to require or enforce most noncompetes. This proposal could benefit employees in a wide variety of industries.
If you have an onerous noncompete with a former employer, you may be concerned about legal repercussions. Visit us at our Red Bank, Marlton, or Newark office to learn more.