In some employment arrangements, a non-compete agreement may be formed between the employer and the employee regarding the worker’s interactions with competing companies. A basic non-compete agreement, or non-compete covenant, usually restricts the working from collaborating or cooperating with other companies while they are working for their employer.
For some businesses, a non-compete agreement may be necessary for the protection of the company’s business plans, trade secrets, and confidential information. It is also a way of ensuring that they won’t lose their employees to other similar businesses. In turn, such agreements can often provide workers with more job security, as they can often bargain for better employment contracts by promising not to work with competitors. Some states may limit or prohibit non-compete clauses in a contract.
It is important to be aware that there are new laws governing non-compete agreements that are scheduled to go into effect in 2024 that will be discussed below.
What is an Employment Contract?
Employment contracts are agreements entered into between employers and employees that contain terms and provisions that govern the employment situation. For example, the agreement may provide that the employee will work for the employer for a specific number of hours for a certain hourly wage or yearly salary.
Employment contracts may also provide for benefits, for example, health insurance or paid time off. They may also provide the grounds for termination and the amount of notice each of the parties are required to provide if they want to terminate the contract.
These types of contracts are not used in every employment situation. If, however, an individual’s employment situation is not informal, it is usually advisable to have an employment contract.
It is always best to have the employment contract in writing so that, if a dispute arises in the future, the contract will be available as evidence to help resolve it. It is important to note that courts have held that employees must be provided time to contemplate the employment contract terms before they start the job.
In other words, giving the employee the contract to sign after they have already started working or on their first day or work will not likely be considered suitable. Similar to other types of contracts, employment agreements cannot be signed due to duress, coercion, misrepresentation, or undue influence.
Once an employment contract is made, it will be legally binding on both the employer and the worker. This means that if either of the parties fails to perform under the contract, that party may be held legally accountable in court.
What Is Contained in a Non-Compete Agreement?
A non-compete agreement is usually part of the employee’s general employment contract. Alternatively, it may be signed as a separate agreement. They are generally treated in the same way as any other contract. Non-compete agreements, or covenants not to compete, usually contain information such as:
- The names of the employer, employee, and other parties
- The names of companies or businesses that the worker is restricted from working with, as some agreements simply forbid work with any other company
- How long the agreement lasts
- Penalties or consequences for breaches of contract
Lastly, the agreement may also contain specific instructions regarding litigation and lawsuits. For instance, the parties may agree to undergo mediation rather than a lawsuit in the event of a violation.
What Happens if a Non-Compete Agreement Is Violated?
In most cases, the breaching party may be required to pay a damages award for losses caused by a breach. For the worker, this could also include losses such as loss of business opportunity or loss of profit if they decide to work with a different company beside their employer’s.
For the employer, a breach usually involves a premature termination of the contract. The remedy for this may also be a damages award to pay for lost wages, and a reinstatement of the worker back to their original position.
What Is the Most Recent Law Governing Non-Compete Agreements?
The Non-Compete Clause Rule, or Final Rule, is a new federal law that was voted on in April of 2024 by the Federal Trade Commission (FTC). This new law will ban the majority of non-compete agreements.
This rule will not go into effect until 120 days following the Federal Register’s publication. The Federal Register is a government publication that includes rules and regulations in regulatory documents which have legal effect and general applicability.
This means that the rule will not go into effect until or after August of 2024. Every employer will have to comply with the requirements under this rule.
As such, employers should start preparing as soon as possible for these changes. This means they should meet with their attorneys to ensure they are prepared to comply with the new rule when it takes effect.
It is important to be aware that there is only one exception to this rule’s ban on non-compete agreements. The exception applies to non-compete agreements provided to senior executives by their employers.
This exception was included because these types of agreements made with high level employees are more likely to have been negotiated than other types. If a worker was not a senior level executive at the time they signed the non-compete agreement, their agreement will not be enforceable once the Final Rule takes effect.
All employers will have to provide all workers who signed a non-compete agreement with a notice that the agreement cannot be enforced. This may require employers to revise or completely rewrite their current employment agreements.
How Does this Affect State Laws?
State laws that do not conflict with the Final Rule will not be affected. The Final Rule is a federal law, meaning that it will preempt any state laws that conflict with it.
This means that, if a state allows non-compete agreements or has more lenient laws than the Final Rule, it will be preempted and the Final Rule will apply.
What if the Final Rule Is Challenged in Court?
The Non-Compete Clause Rule will most likely be interpreted or challenged by courts in the future. The Rule contains a severability clause, meaning that, if any part of the rule is invalidated or deemed unenforceable by a court, the rest of the rule will not be affected.
The Rule may even be completely struck down at a future date. Because of these many different possibilities, it is essential for employers with workers who signed non-compete agreements to consult with lawyers to ensure compliance with the new applicable law, no matter the state of review it is under.
If an employer or an employee is already involved in litigation concerning non-compete agreements, it is very important to be aware that upcoming changes are likely and the consequences they may have on the case. Although the laws that were in effect at the time the litigation was filed, it is still important to prepare for possible upcoming changes so that the proper arguments can be made in court in order to cover all of the legal possibilities.
This may allow a party to present their case in such a way that they can obtain a favorable outcome no matter the chances made to the Final Rule. It is very important for all clients to ask that their attorneys keep them updated on the changes made to the Final Rule throughout 2024 and in future years.
Do I Still Need to Know about the Previous Non-Compete Agreement Laws?
Yes, it is very important to have an understanding of both the previous and current laws that govern non-compete agreements, both state and federal. This area of law is currently undergoing changes and will be for the foreseeable future.
It is essential for employers to prepare for all of the possibilities and how they may affect how they conduct business. A lawyer can help draft and edit employment agreements as well as draft and edit different versions of agreements to ensure that the proper ones are used at the proper time under the Final Rule.
Do I Need a Lawyer for Help with a Non-Compete Agreement?
Like any other contract agreement, a non-compete agreement may require the assistance of a lawyer. You may wish to hire a contract lawyer if you need help drafting or reviewing a non-compete agreement. Also, your attorney can provide you with legal advice and representation in court if you are facing a lawsuit that involves a breach of the agreement.
