Home Health & Hospice Week

Heed this practical advice for what you need to do now.

Contemplating or already requiring employees to sign a non-compete agreement? If you don’t use this type of restrictive covenant, hold off for now. If non-competes are already in place, check out the following to see how these clauses may soon become a thing of the past.

What Is a Non-Compete?

Definition: A non-compete agreement or clause is a legal contract between an employer and employee intended to prevent the worker from leaving their job for a competitor.

Non-compete provisions impose different restrictions such as:

• Set geographic area – restricts employees from working for a competitor within a certain radius of the employer
• Defined period of time – limits employees from taking a job with a competitor for a set timeframe after their employment ends, or
• Same or similar work/type of business – bars employees from directly or indirectly competing with the employer.

Right now, non-compete agreements are generally valid if they are:

1. In writing — either part of the employment contract or a separate document tied to the contract

2. Based on the offering and acceptance of reasonable consideration

3. Not assignable or limited to the employer with whom the agreement was made

4. Reasonable in duration and geographic limitation

5. Not against public policy

Where Are Things Going?

Presently, states regulate restrictive employment covenants. Some ban non-compete agreements outright, while many more prohibit their use for low wage earners only. Others limit the use for certain types of professions.

On Jan. 5, 2023, the Federal Trade Commission (FTC) proposed that this will change. Its Notice of Proposed Rulemaking (NPRM) declared that about 30 million Americans are unfairly bound by non-compete restrictions.

The FTC asserts that non-compete clauses:

• significantly reduce workers’ wages
• stifle new businesses and new ideas
• exploit workers and hinder economic liberty
• are not the only way employers have to protect trade secrets and other valuable investments.

The proposed rule goes on to define a non-compete clause as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

A rose by any other name: The rule clarifies the definition further by saying that whether a restrictive covenant is considered a non-compete clause would “depend not on what the provision is called, but how the provision functions.”

In essence, it does not directly include other types of contractual restrictions, such as non-disclosure agreements (confidentiality agreements) and non-solicitation agreements. But, the rule does say that such covenants could be considered non-compete clauses “if they are so unusually broad in scope that they function as such.” This means any restrictive covenant will have to pass a functional test to determine whether it is a de facto non-compete clause or one in disguise.

The proposal is sweepingly broad, applying to full and part-time, paid and unpaid, employees, externs, interns, volunteers, and independent contractors.

Bottom line: If the FTC rule is finalized as is, it will make non-compete clauses an unfair method of competition and unlawful for an employer to “enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circum­stances, to represent to a worker that the worker is subject to a non-compete clause,” according to the regulation.

The rule would also require employers to “rescind existing non-compete agreements and actively inform workers that they are no longer in effect.”