The Federal Trade Commission (FTC) has proposed a rule that would largely eliminate noncompetes outside of business sales. A noncompete prevents an employee that has resigned (or even been terminated in some instances) from working for a competitor of the prior employer (or even starting their own business). Sometimes this is a fair deal depending on pay and training provided; many times it is not.
The FTC defines a noncompete clause as a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. The purpose of these clauses is typically to ensure that trade secrets remain private and to inhibit a company’s workers from providing new companies with innovative ideas. Though these noncompete clauses are very beneficial to company’s, they have a negative effect on the job market, employee’s, wages, better job opportunities, and competition within the economy.
New Rule Proposal
The FTC has proposed a new rule that would prohibit employers from utilizing noncompete clauses in their contracts. Some of the main aspects that the new rule calls for includes:
- make it illegal for an employer to enter into a noncompete with a worker;
- make it illegal for an employer to maintain a noncompete with a worker;
- and make it illegal for an employer to represent a worker, under certain circumstances, that the worker is subject to a noncompete.
This proposed rule opens the door for a lot of individuals to seek better job opportunities, increase their wages, create new businesses, and increase innovation within a particular industry. In fact, the FTC estimates that the new proposed rule could increase wages by, “nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
This proposed rule would apply to all individuals, including independent contractors, whether their job is paid or unpaid. Employees will have the opportunity to find jobs with higher pay and better working conditions, while other companies will be able to hire individuals that are the best available talent. Noncompete clauses in the current market harms consumers, as there will be fewer new companies entering a particular market and with a very small number of companies in a particular market, higher prices result.
However, despite the many benefits to consumers and employees, there are some negative impacts that will result to businesses. This proposed ban on noncompete clauses will promote the sharing of ideas and trade secrets across an industry, increase the cost of employment, loss of talent within a company, decrease their market share, and likely cause revenues of the company to decrease. This method of restricting individuals from leaving a company provided the business some temporary security while the clause was in effect. Losing the ability to restrict a workers mobility will come with a cost to businesses.
Will it Pass?
It’s a close call. The FTC has quite a broad mandate to regular unfair and/or deceptive trade practices that affect commerce. There will no doubt be challenges to this proposed rule that is interfering with private agreements with employees. This case will likely involve the major questions doctrine (you may have seen this with the recent student loan cases as well) where an agency is limited in creating rules/regulations that have major social, political, and/or economic impact unless the authority to do so was specifically granted to do so by Congress. In other words, your guess is as good as mine.
But, non-competes have become increasingly difficult to enforce throughout the country. And many states have already put in place restrictions – see Non-competition agreements in the internet age – so even if it does not pass, there will likely be restrictions on noncompetes in the coming years.
Non-Compete Agreements in South Carolina
SC courts have routinely enforced noncompete agreements. However over the past few decades, like many states, the scrutiny on these types of restrictions have become higher. And oftentimes for good reason as they become abundantly used by employers.
The key in South Carolina has been in making sure that the non-compete is designed to protect the employer – the courts say “to protect a legitimate business purpose” – and not designed to punish or trap the employee. For example, suppose ample resources are utilized to train an employee and relationships are established while being paid within the employment context. In that case, there’s oftentimes a legitimate business purpose to protect those relationships so long as the restrictions are limited. On the other hand, there are noncompetes out there that are written for 3 years and 60 miles for people making modest salaries and with minimal training. This becomes a bit more punitive to the employee and less about the necessity of the clause to protect the business by restricting that individuals ability to make a living.
The courts require employers to narrowly tailor the agreements to that it is confined in geography and time in addition to being necessary to protect the business interest.
All that to say that noncompetes are enforceable in South Carolina so long as that correct touch is applied when drafting the agreement. Thus, overriding this state law with federal rules would have a dramatic impact on how employers can protect their businesses.
I’d be the first to admit that noncompetes are overused; however, there are many very legitimate applications of a noncompete. Currently, South Carolina law (and judges) have done a pretty good job at striking that balance.
Other Options For Employers – Non-Solicitation and Trade Secrets
Other forms of employment restrictions are likely to be utilized more, including nondisclosure and nonsolicitation agreements. The proposed ban on noncompete clauses will not have any effect on these types of restrictions unless they are so broad that they could be construed as a noncompete clause. These other types of employment restrictions will still afford businesses with some protection in terms of keeping the innovation of their company under wraps. With the ban of noncompete clauses, employers are likely to use mechanisms like the increase of employment contracts that promote longevity as well.
Whether you are an employer that needs help drafting or an employee trying to navigate your noncompete, contact the attorneys at Henderson & Henderson.