Employment contracts are signed agreements between an employer and an employee. It describes the conditions of employment, and although not every employer-employee relationship uses one, they are valuable tools for clarifying many of the difficulties that may emerge from such a connection.
Employment contracts outline both parties’ rights and obligations, as well as a system for resolving difficulties, and are legally enforceable for both parties.
A non-compete agreement may be created between an employer and an employee under certain situations. A non-compete agreement instructs employees not to work with the company’s rivals. It may also restrict employer information or confidential trade secrets that may be disclosed to other competing companies.
A non-compete agreement may also prohibit an employee from starting a competitive firm for a certain period of time after leaving the company. Some terms that may be included in employment contracts designed to protect businesses include the following:
- Confidential information, such as:
- client lists
- trade secrets
- employment information
- demographics
- company practices
- upcoming goods
- marketing strategies
future events
- releases
- Trademarks
- The cost of providing specialized training to workers
Before an employee starts working for a company, the employer will often need them to sign a non-compete provision. Such provisions, however, may be necessary for recently departed workers and past employees.
Many jurisdictions have regulations that control the technicalities and ethics of non-compete agreements in the workplace. However, many jurisdictions oppose these contracts since they limit employees’ freedom to make their own income.
What Is the Most Recent Law Governing Non-Compete Agreements?
In April of 2024, the Federal Trade Commission (FTC) voted to enact a new law, called the Final Rule or Non-Compete Clause Rule, that places a ban on almost every type of non-compete agreement.
The Final Rule does not take effect until 120 days after the publication of the Federal Register. The Federal Register contains regulations and rules that are regulatory documents that have general applicability and legal effect.
The Final Rule, therefore, is not scheduled to take effect until around or after August 2024. However, all employers will be required to comply with the new rule.
This means that they should begin preparations now, which includes meeting with their lawyer or legal counsel to ensure they are complying with the new rule when it goes into effect. The Final Rule does allow one exception to the ban on non-compete agreements.
This exception is for non-compete agreements that were provided by an employer to a senior executive. The exception is allowed because agreements with these higher-level employees were more likely to have been negotiated between the parties that were involved.
In contrast, if a worker is not classified as a senior executive, any non-compete agreement they entered into will no longer be enforceable after the effective date of the Final Rule. Every employer will have to provide its workers who signed non-compete agreements with notice that those agreements can no longer be enforced.
How Does this Affect State Laws?
The Final Rule will not affect or limit the enforcement of any existing state law that restricts non-compete agreements, as long as the state law does not conflict with the Final Rule. Because it is a federal law, the Final Rule preempts any state law that conflicts with it.
What if the Final Rule Is Challenged in Court?
It is likely that the Final Rule will be challenged and interpreted in the future by courts. It does contain a severability clause. This means that if any part or provision or application of the rule is deemed unenforceable or invalid by a court, the remainder of the rule will still apply and will not be affected.
It is also possible that this new rule may be completely struck down in the future. Because of these possibilities, it is very important for employers whose workers have signed non-compete agreements to consult with an attorney. This will help make sure they are in compliance with the new applicable laws, no matter what state of review they are under.
If an individual, whether an employee or an employer, is involved in litigation, it is essential to be aware of the possible upcoming changes and the consequences they may have on the case. Even though the rules that were on the books at the time the case began will most likely be applied to decide the case, it is still important for a client to consult with their lawyer about the upcoming changes so the proper arguments can be made in court to cover all possibilities.
A client may be able to present their claim in a way that will help them with a favorable outcome whether or not the Final Rule is upheld, eliminated, or changed. It is very important that current clients request that their lawyers update them on the changing status of the Final Rule throughout the 2024 year and in the future.
Do I Still Need to Know about the Previous Non-Compete Agreement Laws?
Absolutely. It is essential to be aware of the previous and current laws governing non-compete agreements in a state. This area of law is currently undergoing changes and will be doing so for the foreseeable future.
Because of this, the remainder of this article will focus on the rules that are in place until around August of 2024. The rules discussed below will apply until the Final Rule is in full force and effect.
Is It Possible to Enforce Non-compete Agreements Against Employees?
As previously stated, the enforceability of a non-compete contract is determined by the state in which an employee works. If a certain state has legislation controlling non-compete provisions and contracts, the contract will be enforceable under the state’s laws. Employees violating the legislation by violating their contract may face legal repercussions such as monetary penalties.
An example of such a violation would be if an employee divulges highly guarded trade secrets belonging to their firm to a rival. Such activities are illegal.
Alternatively, certain jurisdictions, such as California, prohibit non-compete agreements entirely. As a result, an employer would be breaking the law if they required their workers to sign such a contract.
If an employer tries to enforce a non-compete provision in a state that does not allow them, the employer, not the employee, will most likely be held accountable for the violation. Furthermore, certain states, such as New York, set tight limitations on the sort of non-compete agreement that may be enforced.
Non-compete agreements with third-party rivals are permitted in several jurisdictions. An example would be if an employee signs a non-compete provision with their current employer. Then a rival business employs the individual with the understanding that they are breaching their non-compete contract. In such cases, the rival employer may be in breach as well.
What Are the Conditions for a Valid Non-Competition Agreement?
In areas where such agreements are permitted, the agreement must be fair and meet many conditions for the non-compete to be enforceable.
These requirements, which include the following, make it simpler for courts to enforce a non-compete agreement:
- Reasonable time restrictions: Most non-compete contracts include a period during which the employee must abstain from competing with the rival of their company. This time constraint must be reasonable, with the definition of acceptable differing by industry.
- Reasonable geographic range: One of the primary functions of a non-compete agreement is to restrict the region in which an employee may work after leaving the firm. National non-compete agreements are sometimes regarded as appropriate in sectors that operate globally. However, jurisdictions prohibiting non-compete agreements may refuse to enforce an out-of-state provision.
- Customers and competitors: More detailed terms are more likely to be enforced. Limiting the contract to consumers with whom the employee had close interaction would be appropriate.
- Adequate consideration: Adequate consideration refers to the employee getting some remuneration in return for committing not to compete at some time. Receiving remuneration may be a promotion or increase while employed or severance money after they leave the firm.
What Are My Defenses if I Violate a Non-Compete Agreement?
If you are accused of violating a non-compete agreement, several defenses may be available depending on your jurisdiction’s circumstances and laws. The following are some common defenses that may apply:
- Invalid agreement: You can argue that the non-compete agreement is invalid due to lack of consideration, unconscionability, or illegality. For instance, if you were asked to sign the agreement after you had already started working for the employer without receiving anything of additional value, it may need more consideration and be deemed unenforceable.
- Overly broad restrictions: Non-compete agreements must be reasonable regarding geographic scope, duration, and the scope of restricted activities. If the agreement is overly broad or restrictive, you can argue it is unenforceable.
- Lack of legitimate business interest: Employers must have a legitimate business interest to protect with a non-compete agreement, such as trade secrets or client relationships. If the employer cannot demonstrate a legitimate business interest, the agreement may not be enforceable.
- Employer’s breach of contract: If your employer breached the employment contract or the non-compete agreement itself, you might be able to argue that their breach renders the non-compete unenforceable.
- Public policy concerns: In some cases, enforcing a non-compete agreement may be against public policy. Such as when it would create a monopoly or harm the public by restricting access to essential services. In these situations, the agreement may not be enforceable.
- Involuntary termination: Depending on the jurisdiction, some courts may be less likely to enforce a non-compete agreement if the employee was terminated involuntarily and without cause.
- Change in employment circumstances: If there have been significant changes in your employment since signing the non-compete agreement, such as a change in job responsibilities or location, you may be able to argue that the agreement should not be enforced.
Do Non-compete Employment Contracts Require the Services of an Attorney?
If you are faced with a non-compete employment contract, you should seek the advice of a qualified and experienced contract attorney. A contract law attorney can confirm the contract’s validity and educate you on your contract’s alternatives and duties.
Furthermore, if you believe you have been harmed due to your non-compete, an experienced contract attorney may advise you on your best legal options. An attorney can help you submit the required legal paperwork and represent you in court.
LegalMatch is an online platform that connects clients with experienced attorneys based on their specific legal needs. LegalMatch can help you find a qualified employment attorney to review your non-compete employment contract and offer professional advice.
Here’s how LegalMatch can help:
- Confidentiality: Your information is kept confidential, and you can remain anonymous while discussing your case with potential attorneys.
- Matching process: LegalMatch uses a sophisticated matching process to connect you with attorneys handling employment law, ensuring you work with someone knowledgeable about your issue.
- Attorney profiles: LegalMatch provides detailed profiles of the matched attorneys, including their experience, education, and client reviews, which helps you make an informed decision when choosing an attorney to represent you.
- Free service: The service is free for clients seeking legal assistance. You only pay the attorney’s fees if you hire one of the matched attorneys.
- No obligation: You are under no obligation to hire any attorney you are matched with. The decision is entirely up to you.
To use LegalMatch, simply submit your legal issue and provide background information about your case. LegalMatch will then match you with qualified employment attorneys in your area who can help you with your non-compete employment contract.
