Designed to ensure businesses maintain their position in the marketplace, noncompete agreements prevent former staff members from taking their skills out the door to a competitor. The agreements are often welded to nondisclosure agreements, which are designed to prevent those employees from carrying trade secrets to competitors.
The Federal Trade Commission on Jan. 5 announced its intention to write new rules that will prohibit noncompete clauses for independent contractors and anyone who works for an employer, whether paid or unpaid. Three states and the District of Columbia already ban them; five states have banned them for low-income workers.
Noncompete clauses affect professionals of all kinds: C-suite workers, salon employees, warehouse staff, physicians, boat mechanics, horse trainers—even tradespeople, and especially salespeople.
According to the Biden administration, noncompete clauses hinder innovation by preventing would-be entrepreneurs from launching new businesses. They also hurt companies by preventing them from hiring qualified people with valuable knowledge. The FTC says employees in a relaxed job market could realize a collective $300 billion in higher wages.
Federal rule changes can take years to go into effect, but in the meantime, businesses must prepare for a time when they can no longer rely on noncompete agreements. That means writing stronger nondisclosure agreements to protect proprietary data and other information that gives companies a competitive edge.
Southwest Florida labor lawyers say it’s probably a good idea to review your company’s noncompete contracts now, rather than later.
McIntyre: Virtual offices tough to nail down
Garrett McIntyre, of the McIntyre Law Firm in Fort Myers, has litigated noncompete agreements for both businesses and employees.
“Under Florida law, the employer can oftentimes enforce noncompete agreements, as long as they are reasonable with regard to time and geography,” McIntyre says.
Courts have also ruled that a company must “protect a genuine business interest” in that agreement, not everything under the sun.
“There’s a rule of thumb: The more specialized a profession, the more you get paid, the more the court will be willing to be restrictive for that employee to compete,” McIntyre told Gulfshore Business. “The CEO of a Florida corporation, for instance, would be restricted by all that he knows and all the relationships he’s built in the sugar industry. There will be a tight restriction in his noncompete clause.”
Software and IT companies especially rely on noncompete agreements, but virtual workplaces can make such agreements unenforceable. The internet erases geographic boundaries; employers should write noncompete agreements that define their digital neighborhood or virtual marketplace.
“I have clients in IT—some of them want to tell employees in their noncompete clauses, ‘You can’t open an office within 50 miles of our office locations,’” McIntyre says. “But employees open ‘virtual offices’ which are little more than websites, so it’s difficult to pinpoint their location. They win clients and business through those virtual offices and send workers to client sites near their former employer’s office.”
Training: A lost investment
Though noncompete clauses are different from nondisclosure agreements, the two are inextricably linked. Companies spend years training and educating employees in their intellectual property re: processes, sales techniques or secret manufacturing processes. Employers will be left trying to protect information with confidentiality protections and similar arrangements.
“That’s a lot of time and investment,” McIntyre says. “Suddenly the employee says, ‘Thank you very much,’ then quits and opens a competing business four doors away.”
Preventing noncompete breaches
Otto Immel, a labor attorney with Quarles in Naples, said companies should educate workers on their noncompete rules as they are on-boarded, or hired.
Protect the data in advance. Employers should consider which administrative or staff positions access the most sensitive proprietary information. Those are the people who can destroy your competitive edge should they break their noncompete pacts and join a competitor, he said.
“Employers can bring (noncompete) policies and confidentiality obligations to the employees’ attention,” Immel says. “For departing employees, in particular, the best practice is to obtain written acknowledgment of these obligations and to account for all company devices assigned to the departing employee.”
He suggests restricting or prohibiting access to confidential information; prohibiting the use of personal email or cloud-based file-transfer sites on company devices, including Gmail, Google Drive and Dropbox; and banning removable storage devices like thumb drives.
Forensic IT to protect noncompetes
Companies can discover who’s breaking noncompete agreements before the worker goes out the door.
For instance, one company monitors employee activity on company-owned computers, smartphones, iPads and other devices to see if workers are breaking noncompetes.
Administrators should run forensic checks on employee devices based on the propriety of the information they access—customer contact lists, chemical formulas, details of affinity programs and other competitive data.
“Forensic specialists can quickly identify any mass data transfers and attempted cover-ups,” Immel says.
Here’s a basic clue: If an employee searches the internet for jobs at a rival company or emails a competing firm to set up a job interview, that employee is likely about to violate his or her noncompete agreement. That’s a good point to take the employee aside and remind him or her of the penalty for breaking the agreement.
Don’t panic yet
The loss of noncompetes will benefit both companies and their employees, the FTC says. Workers will be free to obtain higher paying jobs, and businesses will have the right to hire trained workers without paying damages to a previous employer.
But how will companies protect their proprietary information? In the absence of honest employees who adhere to their nondisclosure agreements, companies can secure IT systems and deploy automated alerts for unauthorized transfer of proprietary information.
The danger of losing one’s best workers to competitors will grow once the FTC bans noncompete agreements. Companies in the same marketplace could enter bidding wars over the same skilled workers—or risk suffering a brain drain.
“First of all, I would not hit the panic button just yet,” Immel says. “There is still a long way to go before the proposed rule would be in place. Employment agreements that include long-term incentives to remain might make sense. Planning for how not to lose the [employee] in the first place might be better than having an agreement to enforce in court.”
McIntyre agrees. “It’s hard to tell as we sit here what might take the place of traditional noncompetes,” he says. “On the NDAs fitting the bill question, I think there will be a lot of litigation to test the proposed new rules, should they go into effect.”