NONCOMPETE AGREEMENTS MAY BECOME ILLEGAL
Following its recent trend of issuing worker-protective regulations, the Federal Trade Commission (F.T.C.) proposed a rule that would ban employers from imposing non-compete agreements. The reason behind the agency’s rule is to promote job mobility and foster pay rise. According to the agency, studies show that job mobility is one of the more reliable ways of securing a raise in the workforce.
Officials statements from the F.T.C. give further explanations to the proposed rule: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. Chair Khan, also explained that “noncompete block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.” (See complete F.T.C. press release here)
Whether we agree with the rule or not, the reality is that the final rule would become federal law and that business owners must understand what it says and be prepared. Not only comply with it, but to use the legal tools they have at disposal to protect their business in light of the upcoming change.
WHAT ARE NONCOMPETE AGREEMENTS?
So, the first thing business owners need to do is understand what noncompete agreements are. Noncompete agreements are the provisions of labor contracts that limit or restrict workers, either employees or independent contractors, from obtaining employment with a competitor of its employer. This includes self-employment.
As the law stands presently, those provisions maybe enforced if they are reasonable. Which means to have sensible time and geographical limitations. In other words, right now, employers may ask a candidate to sign a contract promising not to work for the competitor next door after he/she receives training with the employer, because it would be unfair to use the employer’s knowledge against itself in the marketplace.
Noncompete agreements are NOT the only contracts that protect employers’ competitive assets. Actually, nondisclosure agreements and well-crafted intellectual property contracts may be more effective in preventing dissemination of confidential or valuable information. Noncompete agreements have been more prevalent just for the fact that they prevent the worker to obtain employment within a certain distance of the prior employment and for a certain amount of time. Therefore, on its face, a noncompete agreement is an “easier” avenue. However, the reality is that noncompete agreements’ enforceability has been questioned and scrutinized in court for years making their litigation expensive. So expensive, it is almost cost prohibitive for most small and medium-sized businesses to enforce.
WHAT TO DO NOW?
So, it is very possible that the rule, or a very similar version, becomes federal law soon. What do business owners need to do?
First, we have to keep an eye on the evolution of this rule because the proposed version makes having, proposing, or suggesting to have a noncompete agreement, ILLEGAL. Hence, the rule may require employers that currently have noncompete provisions to inform its workers that those provision are unenforceable. Additionally, the current law covers independent contractors and interns. Opponents to the rule are focused on at least removing those workers, which would make a big difference on business owners’ duties, so we need to keep an eye on the evolution of the proposed language of the rule.
Secondly, we need to review our human resources documents. If you have noncompete provisions, you may want to talk to your lawyer to create a plan of action.
Third, analyze your business’ core competitive asset. Most likely there are other legal options to protect it. Once you have an specific asset to protect your lawyer will be able to provide a “laser-focus” legal tool.
OTHER WAYS OF PROTECTING YOUR BUSINESS.
It is imperative to understand that the rule aims to promote job mobility and pay raise. It does not prohibit protection of trade secrets or other business assets. It also does not prevent employers from imposing obligations to keep confidences and to protect the good name of the employer on its employees. Therefore, the rule challenges employers with designing more specific legal tools and more sophisticated business structures.
Employers must think about job mobility when hiring new personnel to determine the level of training and access required for each position. Does your cashier need to have access to your book of business? Maybe, No. It is better to craft specific training, compartmentalize access to information, secure all systems, and fully deploy your software’s security capabilities.
Most business owners pay for software with robust user categorization and layering of access; however, they do not take full advantage of those tools. In fact, most business owners do not complete the included training after they buy a software. Or worst, they have lower paid employees take the training because they are “too busy” running the business to take it. This rule will make preparedness imperative and is shedding light on the value of training and information.
Before this rule becomes law, talk to us to craft a plan. It is always better to act than to react.