In January 2023, the Federal Trade Commission boldly announced a proposed new rule that would generally ban the use of non-compete clauses by employers. Bloomberg Law reports that, after receiving roughly 27,000 comments on the proposed rule, the FTC plans to consider changes and approve a final version of the proposal in April 2024.
What is a Non-Compete Clause?
A non-compete agreement is a legal clause in a contract specifying that an employee must not compete with an employer after employment ends. The clause often bars the employee from working for a competitor for a certain amount of time after they leave the company. The non-compete clause might also outline a specific geographic region or market that an employee must not work for. Non-compete clauses also often state that an employee may not reveal proprietary information or trade secrets to other parties before or after employment.
An employer may require an employee to sign a non-compete clause before they start employment. Not all states enforce non-compete agreements.
Non Compete Clause FAQs
What is the Purpose of a Non-Compete Clause?
The purpose of a non-compete clause is to reduce competition and prevent trade secrets from being shared with competitor companies. Non-compete clauses generally encourage employees to stay with a company and not enter direct competition if they leave their jobs. After exiting a company, the agreements can prevent or inhibit workers from getting a new position in their field and geographical region.
What the Update Means For Businesses with Non-Compete Clauses
Employer-oriented stakeholders will likely proceed with litigation once a rule is announced, which could further delay the implementation of any ban. Now is an excellent time to review and compile all existing non-compete agreements in use by your company. You may also want to identify company trade secrets that need to remain protected. The proposed rule is broad in scope but appears to allow employers the right to protect confidential and proprietary information, including customer-related information. It also seems that it will enable provisions that prevent the stealing of employees.
Are Non-Compete Clauses Legal?
The Biden administration has been actively addressing the issue of employer non-compete agreements since the beginning of the administration. In a related action in May 2023, the General Counsel of the National Labor Relations Board announced her view that many non-compete agreements infringe upon employee organizational and concerted activities rights protected by Section 7 of the National Labor Relations Act. Section 7 rights extend to both union and non-union workplaces.
Are Non-Compete Clauses Enforceable in Michigan?
Non-compete clauses are legal and enforceable in Michigan if they meet specific criteria. They must be reasonable in scope, duration, and geographic region and protect a legitimate business interest such as customer relationships or trade secrets. Bills are pending in the Michigan Legislature to amend the existing favorable laws governing non-compete agreements in Michigan. In short, employer non-compete agreements appear to be universally under attack.
What to do next
Hilger Hammond specializes in employment and business law and is happy to assist you in analyzing the impact of government regulation on non-compete clauses at your company. We can review your non-compete agreements and ensure you meet regulations while protecting your company.
For more information, please contact attorney Ron Reynolds:
