The U.S. Federal Trade Commission (FTC) recently adopted a rule on April 23, 2024, prohibiting employers from entering into or enforcing non-compete clauses with U.S. workers. Ehteshamul Haque, a technology transactions attorney, views this rule as a significant administrative action by the Biden Administration. Supporters believe it will give workers more job mobility, while critics fear it could harm small businesses by allowing dominant firms to hire their best employees.
Haque has spoken with clients in the software development and professional services sectors who are concerned about the rule. Many feel that institutions of higher learning have failed to adequately prepare graduates with the necessary skills. To compensate, employers invest resources in training new hires, only to see them leave for larger companies. Non-compete clauses were used to protect this investment. However, the new rule challenges this practice, putting pressure on employers to find alternative ways to retain employees.
Despite some uncertainty surrounding the rule’s feasibility, Haque suggests that businesses begin decreasing their reliance on non-compete agreements. Instead, he recommends utilizing non-disclosure agreements (NDAs) to safeguard valuable company information. NDAs focus on protecting confidential information acquired by employees during their time with an employer. By focusing on the specifics of what needs to be kept confidential, NDAs can provide a viable alternative to non-compete clauses.
Haque emphasizes the importance of structuring NDAs effectively. They should be tailored to protect legitimate business interests without impeding employees’ ability to use general knowledge and skills acquired during employment. Employers should implement stand-alone NDAs with each relevant employee, rather than relying on generic confidentiality language in contracts or handbooks. This ensures protection of confidential information even after an employee leaves the company.
With the potential decline in the enforceability of non-compete agreements, employers are encouraged to reassess their approach to protecting business assets. By utilizing well-crafted NDAs, companies can maintain control over proprietary information and trade secrets when employees transition to new roles. Haque advises organizations to consider NDAs as a strategic tool in safeguarding critical assets and adapting to changing regulations. This proactive approach will help companies navigate the evolving landscape of employment agreements effectively.
