On April 23, by a 3-to-2 vote, the Federal Trade Commission approved publication of its final rule banning post-termination worker noncompete agreements nationwide. If this rule survives the inevitable court challenges, it could seriously damage staffing firms, virtually all of which use such agreements. The rule contains limited exemptions for noncompetes that are incident to the sale of a business or that were violated before the Rule’s effective date of Aug. 24.
The Bad News
The rule bans all new “geographic” noncompetes, which forbid competition by a former worker in a defined territory for a certain time after termination of the worker’s employment or independent contractor relationship with that employer.
The rule blocks enforcement of existing noncompetes for all workers other than current senior executives, and it mandates expensive notices to all other workers that noncompetes are not enforceable against them, regardless of agreements and other documents that impose or suggest such restrictions. This notice process must be completed before the rule’s effective date.
The rule deems violations “unfair methods of competition” triggering the FTC’s right to sue employers, and it claims to supersede inconsistent state statutes, regulations, orders, or interpretations unless the state grants workers greater protection than the rule does.
The Sort-Of Good News
The rule does not ban noncompetes during employment. It also does not ban post-employment obligations that are not noncompetes, such as duties of confidentiality, client non-solicitation, employee non-recruitment, or reasonable reimbursement of training costs. However, the FTC claims the alleged right to deem such other post-employment obligations to be so strict or unreasonable as to be de facto noncompetes subject to the ban. This slippery slope could lead to bans on all competitive restrictions.
Even when client non-solicitation agreements are allowed, the rule will reduce their effectiveness drastically, because even courts have recognized that, without the help of geographic noncompetes, client nonsolicitation covenants, standing alone, are too difficult to investigate and enforce. It is hard to track a former employee’s competitive actions, and if they are discovered and challenged, the employee can cripple the employer’s legal enforcement position by temporarily suspending competition in the territory.
Staffing firms might be able to recover some protection forbidden by the rule by using so-called “tail” agreements or other methods of retrospectively, selectively, and conditionally arranging to reward actual post-employment noncompetition — instead of punishing the violation of noncompete agreements entered at the inception of employment. It is not yet clear whether the FTC would tolerate such indirect methods of employer protection.
What To Do
The rule is likely to be overturned by the courts as an unconstitutional preemption of the sovereign states’ “police power” and of the legislative authority of Congress, but by then, employers may have been forced by the risk of government litigation to abandon and disclaim their noncompetes.
In the meantime, here are steps staffing firms can take in preparation:
- Gather all employment agreements, manual policies, free-standing confidentiality and noncompetition agreements, and other documents that state or imply a post-employment noncompete.
- Identify and document the status of current senior executives exempted by the rule.
- Have knowledgeable legal counsel review the documents, provide a strategy for compliance with the notice mandate of the rule, and create or approve the text of communications to workers on the subject.
- Have legal counsel review the entirety of employment and independent contractor agreements to ensure that what remains after compliance with the rule fully serves the employer’s interests within the limits of state law.
- Have legal counsel review the remaining employment agreement and potentially propose a wholesale replacement for that document. Many issues other than the noncompete issue may require better agreements.
- Publish the mandated notices.
- Review and strengthen the protection of confidential information.
- Have counsel prepare new employment contracts and policy documents to have active workers execute in the event the rule is struck down by the courts. Because of trends in state law, it is advisable to provide special consideration for workers to execute such new agreements, but the amount can be minimal (as little as $100 has passed judicial muster).
- Investigate the feasibility and design of “tail” agreements or other arrangements for rewarding post-employment non-competition.