Help! Are Noncompetes and Confidentiality Agreements Still Valid?

Over the last few weeks, non compete clauses and confidentiality clauses have been in the news and clients have a lot of questions and concerns about their employees’ restrictive covenant agreements and severance agreements. We’re here to set the record straight.

In January, the Federal Trade Commission (FTC) proposed a ban on noncompete clauses typically found in employee covenant agreements. Separately, in February, the National Labor Relations Board (the NLRB) issued a ruling overturning nondisparagement clauses typically found in separation/severance agreements. These recent rulings have employers wondering whether their current agreements are still in effect and what to do.

Proposed Ban of Noncompete Clauses

The FTC proposed a rule that if enacted prohibits employers from using noncompete clauses. The FTC justified the rule by claiming noncompete clauses suppress wages, hamper innovation, and block entrepreneurs from starting new businesses. The FTC reasons that stopping noncompetes through the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

What does this mean for employers?

Right now nothing, as the rule is simply proposed. But if it passes, the FTC’s new rule would make it illegal for an employer to:

• enter into or attempt to enter into a noncompete with a worker;

• maintain a noncompete with a worker (i.e. even if it was legal when it was signed, it no longer is because the proposed rule is retroactive); or

• represent to a worker that the worker is subject to a noncompete.

Can employers include non-solicitation and confidentiality clauses?

Yes. The FTC’s proposed rule does not address non-solicitation clauses, so employers can continue their use. However, an overly broad non-solicitation clause that actually works as a noncompete clause would be banned.

When will the noncompete ban rule be implemented?

The required public comment period runs through March 20th. Then, the FTC may finalize the rule or adopt alternatives.

Once the final rule is exacted it becomes effective 60 days after publication of the final rule in the Federal Register, followed by a 6-month compliance period during which employers would be permitted to work toward compliance.

Modification of Confidentiality and Non Disparagement Clauses

In February the NLRB concluded that broad confidentiality and non disparagement clauses are unlawful. The NLRB reasoned that confidentiality and nondisparagement clauses “chill” employees’ from exercising their rights under Section 7 of the National Labor Relations Act (the Act). This decision overturned two prior decisions that had permitted employers to include confidentiality and nondisparagement clauses. This ruling is effective immediately.

The NLRB found that Confidentiality and nondisparagement provisions commonly found in separation/severance agreements prevent employees from publicly criticizing employer policies and raising complaints about the employer with others.

What does this mean for employers?

Effective immediately all employers should modify any confidentiality provisions used with its employees. The Act excludes managerial employees, supervisors, independent contractors, public sector employees, agricultural laborers, domestic service workers, and individuals employed by a parent or spouse from its “employee” definition.

Does the ruling affect confidentiality provisions related to trade secrets and other confidential information?

No, the confidentiality clause that was struck down related exclusively to the confidentiality in the terms of a severance agreement. Employers may continue to use confidentiality clauses to protect trade secrets, and proprietary and other confidential information.

What should employers be doing now?

The Firm recommends judicious use of noncompete and confidentiality clauses. Noncompetes can be a useful tool, but overuse and overly broad clauses can lead to having them overturned, regardless of whether the FTC rule is in place.

Because the NLRB decision is effective immediately, any separation agreements that are in use should be evaluated by the employer and legal counsel to ensure compliance.

No one size fits all answer is available. There are a number of options to consider including eliminating noncompetes, confidentiality and non disparagement clauses altogether or modifying the clauses. Our team can perform a risk analysis to help employers decide which options are right for their company.

If you have any questions on how these laws affect you or your business please don’t hesitate to reach out: info@barbascremer.com. We are here to help you address the day to day questions of balancing business concerns, the law, and your competitive advantage.