By Nicole L. Stangl
September 27, 2023
In today’s interconnected world, how to protect vital business assets such as key employees and confidential information is top of mind for businesses. Tools such as non-solicitation, non-compete and non-disclosure agreements are utilized as a method of protection for businesses. However, the changing legal landscape related to non-compete provisions has made it essential to be diligent about what tools you use and how you use them to properly protect your business.
What is a Non-Compete Provision?
Non-compete provisions are used to restrict an employee from engaging in unfair competitive practices post-employment. Wisconsin law has always placed scrutiny on non-compete provisions and they should be drafted narrowly to protect your legitimate business interests in accordance with established laws.
The following are various types of restrictions that often make up the term “non-compete”:
- Non-Competition: A non-competition provision prohibits employees from leaving your business and providing similar services to a competitive business within the region where you conduct business. For example, a non-compete restriction would prevent your employee from moving across town to a competitor and using the skill set you helped them build for that competitive business.
- Non-Solicitation of Employees: A non-solicitation of employees provision protects your business by prohibiting the past employee from poaching your key employees to come work for a competitive business. For example, if your head salesperson leaves, you would not want him to come back and solicit the other salespeople underneath them to leave and work for a competitor with them.
- Non-Solicitation of Customers: A non-solicitation of customers’ provision prohibits past employees from stealing customers. It prohibits the past employee from taking customers that they have a relationship with because of their employment with your business or that they have special knowledge about because of their employment with you.
- Confidentiality & Trade Secrets: Confidentiality and Trade Secret provisions protect confidential business information and trade secrets. It prevents the employee from sharing information, including competitive business information such as practices, business strategies, pricing, customer lists, and more.
Changing Landscape for Non-Competes
In 2023, two different federal agencies have taken action to attempt to reduce the use of non-compete agreements.
The FTC Rule: On January 5, 2023, the Federal Trade Commission (FTC) announced its proposal of a rule that would ban employment non-compete provisions in most cases. The proposed rule covers all workers, not just employees, but also independent contractors, interns, volunteers, etc. The proposed rule prohibits non-compete restrictions which it defines as “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.” It also provides a functional test to determine whether a contractual term meets the definition of non-compete. Thus, under the proposed rule, any of above the listed provisions (i.e., non-solicitation provisions) could be considered a “non-compete” and banned if it is drafted in a way that prevents the employee from accepting other employment.
The FTC received over 20,000 comments during the comment period which ended on April 19, 2023. It is expected that the FTC will not finalize the rule until April of 2024. Additionally, the FTC’s rule, once finalized, will likely face legal challenges.
NLRB Memorandum: On May 30, 2023, the National Labor Relations Board (NLRB)’s General Counsel publicly announced her position that most non-compete agreements violate the National Labor Relations Act (NLRA) by chilling employees’ ability to exercise their rights to engage in protected activity. Arguably, the scope of the NLRB’s position extends beyond just the traditional non-compete provision but also to broadly drafted non-solicitation provisions or confidentiality provisions.
Remember, the NLRA applies to all private sector employees that are in non-supervisory positions. This means these employees may now be able to bring a claim to the NLRB that their non-compete is in violation of the NLRA.
The memorandum included reference to types of non-compete provisions that will not violate the NLRA, including:
- provisions that clearly restrict only individuals’ managerial ownership interests in a competing business;
- independent-contractor relationships; or
- circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.
Narrowly drafted non-solicitation and confidentiality provisions can still be an effective tool to protect your business. Non-compete provisions may still be a viable tool in some cases, but it is important for employers to evaluate this risk regarding current employees with non-competes, and how they use non-competes moving forward.
The scope of the enforcement by the NLRB will become apparent. There could be a variety of changes to the proposed rule by the FTC by the time it is finalized. It will be important for employers to continue monitoring this changing landscape to effectively use the employment protections available to protect the business. Contact legal counsel to navigate what non-compete provisions you may want with key employees to protect your business and to ensure drafting of enforceable agreements to continue to protect the business.
© 2023 The Business News. Northcentral and Westcentral editions. Reprinted with permission.
This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.
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