McDonald's has fought in court to defend contracts that require...

McDonald's has fought in court to defend contracts that require franchisees to agree not to hire anyone who has ever worked for McDonald's or another McDonald's franchisee in the previous six months. Credit: NurPhoto via Getty Images

The Federal Trade Commission has issued a proposed rule that would ban employers from imposing noncompete clauses on workers. Put simply, noncompetes prevent an employee from working for a competitor or starting a competing business typically for a certain period of time and in a certain geographic area after employment ends.

The FTC maintains noncompetes harm competition by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.

Experts say the FTC action will likely face legal challenges if adopted — but also force companies to look at other means to protect their investments.

“This is a very significant and meaningful proposed change to the laws governing employee mobility,” says Preston Ricardo, a partner at Golenbock Eiseman Assor Bell & Peskoe in Manhattan. He said 47 states plus Washington, D.C., have statutes governing the enforceability of noncompete agreements.

While New York doesn’t, state courts have developed a “body of law” over time to provide guidance in this area, Ricardo says.

Still, “none of the states including New York have bright-line rules,” and that creates uncertainty for employers and employees, he says.

In New York, enforceability is reviewed by courts on a case-by-case basis and ultimately comes down to a “test of reasonableness,” Ricardo says.

Preston Ricardo, a partner at Golenbock Eiseman Assor Bell &...

Preston Ricardo, a partner at Golenbock Eiseman Assor Bell & Peskoe in Manhattan. Credit: The Golenbock Law Firm

The FTC argues “companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts.”

This particularly can hurt low-wage workers, says Alan Hyde, a professor at Rutgers Law School in Newark, New Jersey, who writes and consults on noncompetes.

“People have been surprised at how widely they’re used for workers in low-wage jobs like fast food,” he says. Hyde pointed to an example of McDonald's, which has fought in court to defend contracts that require franchisees to agree that they will not hire anyone who has ever worked for McDonald's or another McDonald's franchisee in the previous six months.

Alan Hyde, a professor at Rutgers Law School in Newark,...

Alan Hyde, a professor at Rutgers Law School in Newark, N.J. Credit: Victor Wong

Hyde thinks the restrictions are unnecessary, noting, “I don’t think anybody benefits from noncompetes.”

He said they’re completely outlawed in California and he has not seen that negatively impact tech firms there. He believes companies still can protect proprietary information via trade-secret law.

But Jon Trafimow, a partner at Moritt Hock & Hamroff in Garden City and the firm’s employment law practice group leader, says that while companies can have legal rights under trade-secret law, by the time a company knew their secrets were shared, it could be too late.

Further, the information they may want protected may not technically qualify as a trade secret, but it’s still important information, he says.

Under the proposed rule, companies could potentially use other restrictive covenants like nondisclosure agreements, but Trafimow said even those could be at risk.

The FTC, in the proposed rule, argues a nondisclosure agreement could be a noncompete clause in disguise if it’s “written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment.”

“Sometimes noncompetes can be overused,” and employers may consider other tactics, like having an employee sign a nonsolicitation covenant that could prevent that person if they leave from, say, soliciting the company’s customers for example, Trafimow says.

Jon Trafimow, a parter at Moritt Hock & Hamroff in...

Jon Trafimow, a parter at Moritt Hock & Hamroff in Garden City Credit: Daphne Borowski Photography

Paul Severino, president of Intelligent Product Solutions, a Hauppauge-based product design firm, says IPS has never imposed noncompetes on employees, but rather uses nondisclosure agreements.

They’ll use nondisclosures to protect a client’s intellectual property, but they are usually narrow in scope and tailored to the project itself.

Severino doesn’t believe in noncompetes because “if you had employees that didn’t want to be here, it could have a negative impact on our culture,” Severino says.

Still, noncompetes can be beneficial and important in instances involving senior-level employees who are entrusted with company trade secrets, or where the company has invested significant resources to build client relationships, or where the employer may have sweetened deals to entice a worker to sign a noncompete with significant perks, promotions or bonuses, says Ricardo.

Andrew Lieb, managing partner of Lieb at Law PC in Smithtown, agrees, noting, “I have many corporate clients that give different salaries and/or bonuses and/or career opportunities based on whether the employee is subject to a noncompete, amongst other facts,” he says.

Lieb believes the FTC’s final rule should be scaled back to cover only new noncompetes, not ones already in existence, because otherwise there’s no recourse for companies to get back their past investment.

The FTC addresses some concerns about protecting investments in the rule itself (see https://tinyurl.com/2p8uswpn) and has opened the proposed rule for public comment through March 10. Click here to submit comment.

Fast Fact:

About 1 in 5 American workers is bound by a noncompete clause. That’s approximately 30 million people.

Source: Federal Trade Commission (https://tinyurl.com/3traaukd)

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