One of the biggest issues affecting employers, contractors and employees in 2024 may be the elimination of non-compete contracts depending on the actions of the Federal Trade Commission in April.
Throughout 2023, the government agency has been looking at eliminating the use of non-compete contracts by all businesses when it comes to workers and contractors. Nearly 30,000 people have weighed in on the proposed action.
If passed, companies will need to ensure they have worked with employees and contractors on strict non-disclosure agreements to protect its company secrets.
But in the fall, a business’ best employee may be able to go work for a competitor a day after leaving and there will be no recourse for the company.
The attorneys at The Orlando Law Group can help ensure your non-disclosure agreements are comprehensive and enforceable to protect your business and can work through any issues this new rule may cause.
What is a non-compete contract?
Nearly every executive or contractor has signed a non-compete contract in the past. In most cases, the non-compete contract is presented as part of the employment package at the time of the person being hired.
Under the non-compete contract, an employee is not able to work for a competitor for a specified period, many times several years. If the employee decides to work for a competitor, they will be required to pay back any severance and, perhaps, damages.
Too often, it was not a negotiated contract, but something that was required – basically a “sign this if you want to work here.”
And since the employee has very little negotiation power at that point, the non-compete contract is often valid regardless of how the employment is terminated – even if the worker is laid off or fired!
The federal government says non-competes are bad for the economy.
In a nutshell, the Federal Trade Commission says non-compete contracts are an “unfair method of competition” and are in violation of Section 5 of the Federal Trade Commission Act.
That act basically says anything that affects consumers in the following ways is not permitted, specifically something that:
- causes or is likely to cause substantial injury to consumers,
- cannot be reasonably avoided by consumers, and
- is not outweighed by countervailing benefits to consumers or to competition.
In dealing with non-competes, the Federal Trade Commission says it will increase the wages in the United States by $300 billion and give employment freedom to more than 30 million Americans.
In addition, the government maintains that by eliminating non-compete contracts, prices will decrease because there will be more competition.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan in the release announcing the rulemaking process. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.
“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition,” she added.
Additionally, the release discussed how the Federal Trade Commission believes non-competes hinder innovation and increase consumer prices.
“The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses to inhibiting workers from bringing innovative ideas to new companies,” the release says. ‘This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices.”
Is this going to happen?
It has been almost a year since the Federal Trade Commission announced it was starting the rulemaking process to eliminate non-compete clauses. At the time, the commissioners voted 3-1 to start the process.
Since then, the commission allowed for public comment and extended the period because there were so many comments being submitted. All told, approximately 27,000 individuals filed a comment.
As the lone vote against the rulemaking process, Commissioner Christine Wilson provided a 14-page document with her reasons for voting against it. In it, she talked about:
- how there has been more than a century of case law upholding non-compete contracts.
- how this issue is a legislative issue for Congress to address,
- how there has been very little enforcement on this issue,
- how the issue has limited research, and
- how other protections, like non-disclosure agreements, are not proven to protect businesses.
However, Commissioner Wilson’s term ended in March 2023, and she was not reappointed by President Joe Biden. The Federal Trade Commission is bi-partisan and two new Republican appointees for the five-person board are currently being considered by the United States Senate.
That said, the two new appointees could object and the rule would still move forward unless one of the existing commissioners changes their vote.
After that, the new rule will be challenged in court, and it could take years to be heard by the U.S. Supreme Court. During that time, the rule may or may not be enforced, depending on court actions.
What should businesses do today?
It should be assumed the new rule will be passed in April and will take effect 180 days after the ruling.
Under the new rule, it would “be illegal for an employer to:
- enter into or attempt to enter into a non-compete with a worker;
- maintain a noncompete with a worker; or
- represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
As such, the only protection a business would have from an employee taking their trade secrets to a competitor is by having a non-disclosure agreement.
In that contract, the employee or contractor agrees not to share any confidential information and there are severe consequences for breaking the contract.
It is critical all businesses that operate with non-compete contracts have reviewed and implemented non-disclosure agreements in early 2023.
The attorneys at The Orlando Law Group can help businesses with these types of contracts in Orlando, Waterford Lakes, Altamonte Springs, Winter Garden, Lake Nona, St. Cloud, Kissimmee, and throughout Central Florida.
If you have questions about anything discussed in this article or other legal matters, give our office a call at 407-512-4394 or fill out our online contact form to schedule a consultation to discuss your case. We have an office conveniently located at 12301 Lake Underhill Rd, Suite 213, Orlando, FL 32828, as well as offices in Seminole, Osceola and West Orange counties to assist you.
The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.