Just as the Federal Trade Commission’s blanket ban on noncompete agreements was about to go into effect, a federal court blocked the measure, creating continued murkiness around an already complex topic under HR’s purview.
On Aug. 20, U.S. District Judge Ada Brown of the Northern District of Texas issued a nationwide injunction on the FTC noncompete ban released earlier this year. The ban, which was set to go into effect Sept. 4, would have barred virtually all U.S. employers from requiring workers to sign noncompete agreements. The measure would have additionally required employers to send a notice to affected workers that their existing noncompetes were void, according to Shannon Hampton Sutherland, co-chair of the Duane Morris law firm’s Non-Compete & Trade Secrets Practice.
It was a rule that drew sharp employer backlash.
“As the effective date inched closer, legal challenges to the ban conflicted, yet were unsuccessful in defeating the ban for all employers,” says Hampton Sutherland.
In the lawsuit from global tax services and software provider Ryan, however, Brown held that the FTC noncompete ban “shall not be enforced or otherwise take effect on … Sept. 4 or thereafter” for any workers or employers. An appeal from the FTC appeal will be an uphill battle, according to Hampton Sutherland, which means noncompete agreements can again be considered status quo.
She says that in the short term, HR professionals must be clear and consistent in how they educate leadership and employees about this complex topic.
“The FTC’s noncompete ban brought with it ‘back-seat lawyering’ within the employee ranks—often based on misinformation,” Hampton Sutherland explains. “It’s important for HR to have a good handle on the ban’s status to ensure consistent messaging.”
Reexamining policies post-FTC noncompete ban
Even with the FTC noncompete ban dead for now, the rule’s near-enactment means that HR should take a “fresh look” at the company’s agreements that contain post-employment restrictive covenants, Hampton Sutherland says. Such agreements have traditionally been governed by state law, and conflicting state laws already create thorny issues for employers.
Because the now-defeated FTC noncompete ban was highly publicized, she notes, we will likely see some state legislatures moving forward with their own noncompete bans.
“Now more than ever, it’s important for companies to take a close look at what information and interests they need to protect and what levels of protection are needed and appropriate across their workforce,” she says.
A narrower scope for noncompetes
Scott McDonald, a shareholder at the Littler law firm, says that in the wake of the halting of the FTC noncompete ban, employers should consider the wider goals and implications of such agreements for their respective organizations.
McDonald says the purpose of a valid noncompete agreement is to protect employers’ investments in developing confidential information, training and critical business relationships that are entrusted to key employees. A proper noncompete, he adds, is narrowly tailored to prevent competitors from gaining access to information and resources that would give a competitor an unfair advantage.
“The noncompete prevents a predatory competitor from skipping the time and expense involved in developing its own assets of this nature by hiring away key employees who embody the original employer’s investment,” McDonald says.
He explains that noncompetes have been used for this legitimate purpose in most states for over a century, adding that critics often point to examples where noncompetes are used without legitimate justification for the type of employee involved.
“Use of noncompete restrictions with low-wage workers and overbroad restrictions that prohibit any employment in the industry are common examples,” McDonald says.
HR should also consider the important distinction between harmful noncompetes and those that are justified.
That was a point raised in the recent Ryan case in Texas. The court found the FTC’s noncompete ban went too far because it prohibited employers from “entering into or enforcing virtually all noncompetes—instead of targeting specific, harmful noncompetes.”
Given the evolving landscape for noncompete agreements across states, McDonald says HR professionals must understand what those parameters are—for example, any applicable low-wage threshold that may apply.
“The key for HR professionals seeking to guide all interests involved is to understand what the employer’s justification is for any restrictions being used,” McDonald says. “This helps the employer fashion a narrower and more justified restriction, and it helps HR professionals explain the importance and overall fairness of the agreement to employees.”
The post With FTC noncompete ban overturned, what does HR need to do? appeared first on HR Executive.