The federal government is proposing a change that would significantly restrict the use of noncompete agreements.
The Federal Trade Commission has issued a Notice of Proposed Rulemaking that would invalidate all noncompete agreements — both existing and future — signed by employees. The documents would only remain valid when signed by company owners who hold at least 25% of a business.
Currently undergoing its open comment period, the proposal seeks to address what some consider an abuse of the noncompete agreement. These contracts originally were meant to keep previous owners or key employees of a company from using the previous company’s contacts and other key information from compete against the original firm, says Steve Getzoff, outside national counsel for the Pool & Hot Tub Alliance, and a partner in New York-based Lester Schwab Katz & Dwyer.
But now, some employers are using them with line-level staffers.
“If you have your employees sign an agreement that says they can’t work in their chosen field where they live for a year or two, what are they supposed to do?” Getzoff says.
This federal move continues what several states have already begun, Getzoff said. Many courts have called them unreasonable for employees, and California has gone so far as to say that a contract will be invalidated completely, even if it only contains a few lines of noncompete language.
If the rulemaking passes in its current state, employers will have to not only consider these agreements void, but also communicate that fact to past and present employees who have signed one.
