January 14 Tip of the Week
“The Future of Non-Competes”
Employers may or may not have heard of a federal law banning non-compete agreements and may feel up in the air as to whether they can enter into or enforce non-compete agreements with their employees. On April 24, 2024, the Federal Trade Commission (FTC) proposed a rule banning most non-compete agreements. The rule had an effective date of September 4, 2024, but the rule was enjoined by a court on August 20, 2024. There is currently no federal law banning non-compete agreements.
However, five states currently have laws banning non-compete agreements with more on the horizon after the federal rule was struck down. Employers must know state law, not just federal law, when deciding whether to require employees to sign non-compete agreements. Even in states that do not have a total ban on non-compete agreements, many states have passed laws or established case law restricting the elements of non-compete agreements.
Overall, a non-compete agreement must not be a total restraint on trade. An employee must be able to continue to earn a living. However, in many states an employer may impose a geographic restriction prohibiting the employee from working within the employer’s trade area. This can be more difficult with a global company with business conducted electronically across many different areas of the United States or the world. In states with few restrictions on non-compete agreements, the agreement must still be narrowly tailored to protect the employer’s business interests. A non-compete agreement preventing an employee from working in the employee’s specific trade anywhere on Earth is not likely to be upheld.
State laws vary in the reasonableness of time limits in non-compete agreements as well. Some states may reject a non-compete agreement restricting the employee for more than a year, while some states may allow a non-compete agreement restricting the employee for up to five years. It is critical to know the law in your state.
Another way in which state laws may differ is the way in which a judge will handle a non-compete agreement that the judge finds noncompliant. Judges may be obligated to strike the noncompliant provision, rewrite the agreement to bring it into compliance, or reject the agreement altogether. An experienced employment law attorney can advise on how a noncompliant provision would be dealt with in your state.
Non-solicitation agreements are often a safer way to protect your business interests when an employee separates from employment; however, state laws vary on the specific components of these as well. Some states may allow employers to prohibit the employee from doing business with any of the employers current, former, or prospective clients. Other states may limit the prohibition to clients with which the employee had direct contact during their employment.
Nondisclosure and confidentiality agreements drafted by legal counsel are not typically subject to the level of controversy that surrounds non-compete and non-solicitation agreements and are important to consider when bringing on board an employee who will be exposed to sensitive information.
The only way to navigate the nuances of the many state laws surrounding non-compete and non-solicitation agreements is with the help of an experienced employment law attorney.