Employers have traditionally relied on non-compete agreements to safeguard their intellectual property and maintain a competitive edge. As a business owner, I’ve used various non-compete agreements in the past, primarily to protect proprietary information, customer lists, and vendor relationships.
Recently, I dealt with a contractor who signed a non-compete agreement only to steal a wealth management services vendor, copy my sales strategy, and contact my existing clients. Why didn’t I enforce the agreement? I believed this individual was such a poor salesperson that they would fail and eventually leave the industry. However, that’s not always the case—employers must protect their business and sensitive information.
While non-compete agreements aren’t legal in all states, they’re often criticized for restricting employees’ future job opportunities and preventing them from leaving their current employer.
In January 2023, the Federal Trade Commission (FTC) proposed a rule banning non-compete clauses in employment contracts across all industries. The FTC’s proposal is based on a preliminary finding that non-competes constitute an unfair method of competition, violating Section 5 of the Federal Trade Commission Act. If implemented, this rule would make it illegal for employers to:
- Enter into or attempt to enter into a non-compete with a worker.
- Maintain a non-compete with a worker.
- Represent to a worker, under certain circumstances, that they are subject to a non-compete.
However, a Texas judge recently blocked the FTC from enforcing this universal ban. US District Judge Ada Brown ruled that the FTC lacks the authority to enforce the rule, which was set to take effect on September 4. She argued that the FTC relied on “inconsistent and flawed empirical evidence” and failed to consider evidence supporting non-compete agreements.
The FTC argues that non-compete clauses suppress wages, stifle innovation, and reduce economic dynamism. Despite the widespread use of non-competes in the corporate world, the FTC believes that banning them would allow workers to change jobs or start businesses in the same field freely.
While employees have various ways to challenge non-compete agreements, employers can use alternative strategies to protect their business without relying on such clauses.
These strategies include:
- Non-disclosure agreements (NDAs): NDAs protect confidential information, trade secrets, and proprietary knowledge. Employees who sign NDAs agree to keep sensitive information confidential both during and after their employment. It’s essential to clearly define “confidential information” in an NDA, covering areas such as client names, pricing, financial details, and intellectual property.
- Non-solicitation agreements: These agreements prevent former employees from soliciting clients, customers, or other employees. They are focused on preventing individuals from poaching business from their former employers.
- Clawbacks for paid training and education: Employers can reclaim funds invested in employees’ training or education if they leave the company within a specified period. This can be an effective way to protect your investment in employee development.
- Golden handcuffs: These are incentives designed to retain valuable employees by offering benefits such as bonuses, stock options, company cars, or tuition assistance. Golden handcuffs are particularly common in industries where employees receive high compensation and may receive competitive offers from other companies.
These strategies must be carefully designed to comply with local, state, and federal employment laws. I recommend consulting with your attorney and financial advisor to ensure these approaches align with your state’s legal requirements.
