Chess pieces around a fallen king like a non-compete agreement restraintFor some of my clients, it became a matter of pride when they were presented with a non-compete agreement. It usually meant that their careers had advanced to a stage where they were dealing with employment agreements for the first time and they aren't sure what to do. That pride was often short-lived as we reviewed the non-compete provisions in their contract and discussed the effects they would have on future employment. However, now the times have changed.

In January 2023, the Federal Trade Commission (FTC) proposed a rule that would prohibit employers from entering into, enforcing, or attempting to enforce non-compete clauses with some exceptions. The proposed rule has not yet been finalized but aims to increase worker mobility and encourage competition. The proposed rule would apply to all employers, with some exceptions for agreements that are necessary to protect trade secrets, inventions, or other confidential information.

When it comes to business owners, they have often been in favor of using non-compete agreements for their important executives. Some have even attempted to use non-compete agreements for interns, but that's not a common use for them. Whether they end up being prohibited by the FTC or not, it's important that you understand a non-compete agreement from both the employer and employee sides of the transaction.

What is a Non-Compete Agreement?

Non-compete agreements are legal documents that prevent employees from competing with their employers for a specific period after they leave their job. They are typically used to protect businesses' trade secrets, confidential information, and customer relationships. However, there is a lot of controversy surrounding the enforceability of non-compete agreements, which has led to the FTC's proposal.

One of the challenges with reviewing a non-compete is the time limit set forth in the agreement. The duration often depends on the industry and the type of career path the individual has. Many employers see between six months and two years as a reasonable non-compete time frame, with one year being quite common. However, it is worth noting that some states have specific laws that limit the enforceability of non-compete agreements, such as California, which generally bans them entirely. While you my find the time period to be reasonable, it's important to speak with an attorney to determine what your local courts would say about the proposed restriction.

On the employer side of the transaction, when enforcing a non-compete agreement, it is crucial to do so as evenly and fairly as possible. Failing to enforce it for some employees may render it unenforceable for others if they choose to defy it. As with most contracts, it is best practices to have a clear and concise non-compete agreement that outlines the prohibited activities, duration, and geographic scope. Additionally, the agreement should be reasonable in terms of duration and scope, and employees should receive something in return, such as additional compensation or training, for signing the agreement.

As the FTC proposal shows us, non-compete agreements are a controversial topic, and their enforceability can vary based on the industry, state, and individual circumstances. Employers must ensure that their non-compete agreements are reasonable, and fair, and adequately compensate employees for signing them. There may be changes to non-compete agreements' enforceability in the future, so it is essential to stay up to date on any developments in this area of law.

Do I Need a Business Attorney?

If you or your business needs help with a non-compete agreement, it's important that you talk to a business attorney. Let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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