Non-compete agreements are contractual provisions that prohibit certain employees from competing with their employer after they leave the company. Non-competes can help protect your business from ex-employees using your trade secrets and inside knowledge to your disadvantage.
Recently, however, the Federal Trade Commission (FTC) has proposed a rule that would prevent businesses, with certain exceptions, from making or enforcing contracts that prohibit their former employees from seeking or accepting employment or operating a business in the same trade or industry. The rule also would require companies to rescind existing non-compete agreements and to notify their workers individually of the rescission.
The term “worker,” as defined in the rule, includes any individual who works for a business, including employees, independent contractors, interns and unpaid volunteers. It does not include someone who is merely a franchisee of the business.
This ban also would apply to a “de facto” non-compete clause, which is any provision that has the same effect as a non-compete, regardless of how it is identified or worded. The rule gives two examples:
- A non-disclosure agreement that is so broad that it prevents the worker from continuing to work in the same field
- A contractual term that requires a worker who leaves before a certain period of time to repay so-called training costs that don’t reasonably reflect the actual cost of the training incurred by the employer
The purpose of banning de facto clauses is to prevent businesses from inserting disguised non-compete agreements into employment contracts. However, the loose definition of such clauses may be a source of legal uncertainty once the rule takes effect.
The rule would make one exception to the general prohibition. Workers with substantial ownership interests in a company who want to sell the business or their ownership interest might be required to enter non-compete agreements before they sell.
The rule states that it will supersede any state laws, regulations, orders or interpretations that are inconsistent with it, except those that provide greater protection to workers.
It’s not yet clear when the rule will go into effect, since the FTC will continue to accept comments from the public on the rule until April 19. Nor is it clear that the rule will survive any court challenges that may be lodged. If you want to file a court challenge to the rule itself or you simply want advice on how to comply, you should seek out a knowledgeable business contracts attorney.
Hemmer DeFrank Wessels PLLC is one of Kentucky’s most prominent business law firms, serving businesses and business owners statewide. Contact us online or call 859-344-1188 for an initial consultation in our Fort Mitchell office.