The Future of Employment Agreements and What This Means for Your Business
Nationally, the Federal Trade Commission (FTC) is engaging in rulemaking which could potentially prohibit non-compete agreements (NCAs) between employers and employees[1]. A non-compete agreement is a legal agreement or clause in a contract specifying that an employee is prohibited from entering into competition with their employer following the employee’s separation. These agreements may also forbid the employee from revealing proprietary information or secrets to any other parties during or after employment.
Similarly, a growing number of states are enacting or proposing laws which either limit, or effectively ban, NCAs in their entirety. While a final rule has yet to be proposed by the FTC, and recognizing that legal challenges will certainly follow, it is important for business owners to identify this potential and preemptively audit their personnel documents to determine the best way to protect their business’ confidential information. Even assuming the potential nationwide FTC rule is eventually struck down, it is likely your business does or will soon conduct business in a location that disallows or provides strict limitations on NCAs. This article is aimed at helping business owners tailor their personnel documents to avoid or limit legal challenges to employment agreements with alternatives that can be used to protect the business.
Alternatives to NCAs
1. Specific Non-Disclosure Agreements
One alternative to NCAs is a customized non-disclosure agreement (NDAs) for your business and/or industry. NDAs can be tailored to the specific needs of the business and provide clear guidelines on what is considered confidential or proprietary information. Moving forward, NDAs will need to:
- Define specific terms, such as who is allowed access to this information.
- Detail the purpose for which the receiving party may use the confidential or proprietary information.
- Outline the duration of the confidentiality obligations.
Finally, exclusions from the confidentiality obligations, such as publicly available information and information the receiving party independently developed without any use of confidential information, should also be included.
i. Savings Clause for Unmarked Disclosures
Another provision business owners might consider in their NDAs is a savings clause for unmarked disclosures. For example, a business might hire contractors or employees to work on specific projects. In this case, there could be a need to exchange confidential information by a certain date. A savings clause prevents disclosure of documents or information that might not be marked as confidential but would be of a specific nature that parties would ordinarily recognize as confidential information. Thus, should any unmarked confidential documents or information be shared, any information which should have been marked as confidential can be incorporated into the agreement once the mistake is rectified.
2. Non-Solicitation Agreements
i. Employees and Customers
A non-solicitation agreement can prohibit an employee from soliciting individuals or businesses, such as current employees or customers. While this can protect a business’ ongoing interests and employees, it does not prevent a former employee from competing with your business so long as they are not soliciting the contractually prohibited individuals or entities. This clause should also define “customer,” “employee,” or whatever you are trying to protect to ensure a Court will not deem the language to be overly broad.
ii. “Potential Customers”
In addition, employers commonly want to protect “potential customers” from being solicited by former employees. Once again, the agreement needs to specifically define a “potential customer.” Typically, this will include relationships where goodwill has been developed between the business and potential customer or where there is confidential information surrounding the relationship. Further, the agreement should include a basis of why these “potential customers” are being included in the agreement. However, certain states specifically prohibit “potential customers” and will not enforce the non-solicitation agreement as it pertains to “potential customers”.
3. Intellectual Property Assignments
When intellectual property (IP) is a concern, business owners should consider using an IP assignment clause. These are used to protect a company’s IP rights by ensuring that inventions, designs, or creations made by the departing employee during and within the scope of their employment are automatically assigned to the company.
4. “Garden-leave” provisions
Another alternative to NCAs is a “garden-leave” provision where an employer will pay a departing employee to refrain from working for a certain period of time, typically a period of months. Essentially, the departing employee remains employed but is relieved of their duties during that time and, therefore, cannot work for a competitor. These clauses are widely used in Europe and are becoming more common in the United States.
5. Other Drafting Issues
Businesses should consider bolstering employment contracts with choice of law and choice of forum clauses. Not only do these clauses provide certainty as it relates to potential jurisdictions and venues to litigate any alleged breach and/or injunctive relief that may be sought, but the specific consequences of breaching an NDA may also depend on the jurisdiction in which these issues are litigated. Thus, it is important to keep in mind where these matters will be heard when these agreements are drafted.
Regardless of how business owners choose to move forward in this uncertain era of employment contracts, they need to evaluate their options to protect their relationships and confidential information following the departure of an employee. When considering the best way to protect your business, make efforts to use language to protect the specific interests of your business as opposed to overly broad and inclusive language. Further, be selective of which employees need to sign certain agreements, such as employees who use or interact with confidential information in their daily course of employment and stay informed of any new developments in this area.
Authored by Jimmy Brady and Logan Manthey
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[1] You can view the FTC’s reasoning for this proposal at FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Federal Trade Commission, Jan. 5, 2023, https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.