In January, the Federal Trade Commission proposed a rule that could be a game changer for workers: US employers could be banned from imposing and enforcing noncompete clauses across the country.
The rule could retroactively invalidate existing noncompetes, too.
Approximately 30 million Americans are restrained by a noncompete clause, and due to the resulting decreased competition and lower wages, the FTC says the proposed rule may boost workers’ earnings between $250 billion and $296 billion each year.
What is a noncompete clause?
“A noncompete clause seeks to protect an employer’s business interests (e.g., trade secrets, proprietary information, ‘know-how’ and investment into the individual’s employment with that employer) by preventing the individual from competing with his or her employer somewhere else,” said Michael Schmidt, vice chair of the labor and employment department at Cozen O’Connor law firm at the World Trade Center.
Typically, noncompetes apply to full-time workers and restrict where they may immediately pursue future employment; competitors might be mentioned by name, or by a time frame and location. Noncompetes may also forbid soliciting their employees and clients and sharing confidential information.
Independent contractors, apprentices and interns usually don’t see noncompete language in their contracts, although it depends on the employer.
Steven Mitchell Sack, employment attorney at his law office in Garden City, LI, and author of “FIRED!: Protect Your Rights & Fight Back if You’re Terminated, Laid Off, Downsized, Restructured, Forced To Resign or Quit” (Legal Strategies Publications), said a clause may look like this: “For a period of one year following the termination of your employment for any reason, it is agreed that you will not contact, solicit, or be employed by any person, firm, or business within a 50 mile radius of the Company to which you sold products of the Employer and will not induce, hire, solicit, or otherwise utilize the services of any employee currently employed by the Company.”
Who has them?
Noncompetes are more common for managerial and C-suite positions than staff and hourly roles.
“Low-level employees that do not have the ability to exploit the employer’s goodwill with its customers or significantly impact other legitimate business interests of the employer should not be asked to execute a noncompete,” said Kathleen M. Connelly, partner at Lindabury, McCormick, Estabrook & Cooper, PC, law firm in Westfield, NJ.
Noncompetes are more prevalent in certain roles, levels and industries like sales jobs where “the employee has developed a loyal client following while acting as the ‘face of the company’ and can readily move that business to a competitor,” said Connelly.
Noncompetes are also prevalent in technical and executive positions involved with confidential information, business plans and trade secrets.
Are they really enforceable and if so, how?
They are enforceable, and previous employers can uncover violations through social media such as LinkedIn, from mutual clients or current employees who are in touch with the previous employee. Ramifications can include loss of new employment and financial hardship.
To enforce the noncompete, the original employer sends a cease-and-desist letter to the former employee and new employer.
“If the matter is not resolved at that level, a case is filed in the Supreme Court of the State of New York,” said Jonathan Bell, partner at Bell Law Group, PLLC, law firm, in Syosset, LI.
“Under New York law, to be upheld by a court, noncompete agreements must: not be greater than required to protect an employer’s legitimate business interests. Not impose an undue hardship on an employee. Not cause injury to the public. Be reasonable in duration and geographic scope.”
New York courts typically uphold agreements of one year and a reasonable geographic area (25 miles of the employer’s business).
It gets trickier if you’re working in another state than your employer, like working in Brooklyn while your employer’s based in Chicago.
“The employer will put that into language — the law of Illinois will apply. Then, an individual working remotely in New York speaks to a lawyer,” said Sack.
What would a new law do?
“The FTC’s proposed rule as drafted would ban nearly all noncompetition clauses in employment agreements throughout the US,” said Kelly Magnus Purcaro, partner at law firm Greenspoon Marder, LLP, in Newark, NJ. “The proposed rule would both ban such agreements going forward as well as retroactively invalidate existing noncompetition. The FTC proposal sweeps nationwide and across industries.”
When will it happen?
Don’t bank on it happening within the next year. The public comment period on the proposed rule is open until March 10, meaning the public can submit input online, by mail or in person at certain government locations.
“The FTC considers the comments and may amend or possibly withdraw the proposal based upon some,” said Purcaro. “The FTC review can result in a variety of next steps which would impact timeline — an extended comment period, request for additional responses, undertaking to amend, etc.”
If the rule gets greenlit, it has to go through an administrative analysis and Congressional Review. It still may not be at the finish line.
“If this rule passes, it may be legally challenged up to the United States Supreme Court,” said Bell. “The argument against the rule by a litigant may be that the FTC exceeded its authority under Supreme Court precedent.”
In the meantime, how should you handle noncompetes? For now, it’s business as usual. If you’re laid off, carefully read the separation agreement.
“Smart employees may try to negotiate that any time or geographic restrictions be cut (e.g., from two years to six months) and/or that you will continue to be paid a full salary during the period when your activities are restrained. This is called garden leave,” said Sack.
When you land a new job, if you ask to remove the clause from the employment contract, Sack warned you may risk not getting the job or turning off the employer. Negotiate as best you can.
Sack said, “Never sign a contract with a restrictive covenant if you can help it, but if you must, negotiate to receive better terms in the job offer such as a higher salary, year-end bonus, more vacation time or other perks plus more severance after a layoff.”