Lately, labor laws on injunctive relief clauses and non-compete provisions have been under scrutiny by the Supreme Court of the United States and the Federal Trade Commission (FTC). The Supreme Court will hear cases on labor laws that may include contracts with injunctive relief provisions. Moreover, the FTC recently proposed a ban on non-compete provisions that, if passed, would have significant implications for employers and businesses. This article will explain the possible changes and help your business prepare if there are substantial revisions to labor laws.
WHAT IS AN INJUNCTIVE RELIEF CLAUSE?
Injunctive relief or an injunction is a legal remedy that orders a party to refrain from an act that would cause harm to another party. Generally, injunctions are granted when no other remedies are available, so the only way to prevent further damage is by stopping the stated action. An injunctive relief clause is a part of a contract that orders parties to an agreement to refrain from doing an act that would cause harm.
Injunctive relief clauses are often used in employment agreements to prevent employees from violating non-compete agreements, non-disclosure agreements, or confidentiality agreements. The injunctive relief clause essentially says that if you break an aspect of this agreement, you must be enjoined from causing further harm by stopping the violation. While parties frequently include injunctive relief in contracts, courts do not always enforce them. Courts will likely consider whether there are other available remedies before issuing an injunction.
THE SUPREME COURT’S CONSIDERATION OF INJUNCTIVE RELIEF CLAUSES
A non-compete agreement is an agreement between an employee and an employer that prohibits the employee from competing with the business after their relationship has ended. Non-compete agreements may cover competition that is both direct and indirect. They also usually have a specific period (e.g., the former employee may not compete with the business for the next year after the termination of the employer-employee relationship).
States govern the rules of non-compete agreements differently, so not all non-compete agreements may be considered enforceable. Some legitimate reasons for non-compete agreements include protecting trade secrets, confidential information, company clients, or special training.
States may also consider whether the time limit is reasonable; six months – two years is often considered a reasonable time frame. The time frame also depends on geographical limitations. Some non-compete agreements may specify that the order not to compete is for a particular city, county, or state. The larger the geographical area, the less likely the non-compete agreement is enforceable.
THE FEDERAL TRADE COMMISSION’S NEW RULE
On January 5, 2023, the Federal Trade Commission (FTC) proposed a new regulation that would effectively ban employers from imposing non-compete agreements on their employees. The goal of the new law is to promote competition in industries. The FTC estimates that the proposed rule could increase wages by nearly $300 billion annually.
According to the FTC Chair Lina M. Khan, restrictive non-compete clauses can block workers from freely switching jobs, which, in turn, deprives them of higher earning capacity and better working conditions. On the other hand, Kahn’s argument also states that restrictive non-compete clauses deprive businesses of a talent pool that companies require to grow. Kahn says, “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
WHY IS THE NEW RULE IMPORTANT FOR WORKERS?
Employees often change positions and move between companies if doing so would guarantee them a better wage. However, a non-compete clause restricts mobility – you are prohibited from finding a new job that competes with your old one for six months – two years. Most people can’t afford to wait that period without working. As a result, employees can be pressured into staying at their current job.
Additionally, the FTC believes that non-compete clauses may hinder innovation by preventing potential entrepreneurs from starting their businesses. Further, greater competition can promote incredible growth in a free market. Competition can push companies to create better products, offer more reasonable prices, or expand upon their business models.
WHAT DOES THE NEW RULE MEAN FOR EMPLOYERS?
The FTC’s new rule would make it illegal for an employer to:
- enter into (or attempt to enter into) a non-compete agreement with a worker;
- maintain a non-compete provision in a contract with a worker; or
- state to a worker that the worker is subject to a non-compete in specific circumstances.
The rule defines 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.”
OTHER IMPORTANT CLAUSES IN THE FTC’S NEW RULE
Additionally, the rule provides that some other clauses may be deemed de facto non-compete clauses if they would have the same effect. The FTC gives two examples:
- A non-disclosure agreement that is so broad that it essentially prevents an employee or worker from working in the same role or field once the employment is complete.
- Language in an employment agreement that states the employee must pay back the employer for any training expenses if the employee’s employment is terminated within a specific period of time, where the required payment is not reasonably related to the employer’s expenses incurred for training the worker.
The two examples are not exhaustive and may have implications for other common contract provisions, such as non-solicitation and non-recruit clauses. A non-solicitation agreement is a covenant that prohibits one party from soliciting or attempting to recruit the employees of another party for a certain amount of time.
They may also prevent employees from using trade secrets or confidential information to solicit others. The FTC guidance on the proposed rule suggests that non-solicitation rules don’t usually prevent a worker from seeking or accepting employment. Consequently, the rule wouldn’t ban that provision. On the other hand, if any restrictive covenant is written so broadly that it may act as a non-compete agreement, it could be considered a de facto non-compete.
HOW WOULD THE PROPOSED RULE AFFECT EMPLOYERS WITH NON-COMPETE AGREEMENTS?
If the proposed rule is finalized, employers with non-compete agreements will be required to rescind their non-compete contract by the date of compliance. The proposed rule sets the compliance date at 180 days after the final rule is promulgated. As a condition of rescission, the employer must notify their employees that they are rescinding the non-compete clause within 45 days of its rescission. This notice requirement extends to current and former employees who may have been operating under the restraints of the non-compete clause. A notice will only be considered valid if it is provided on paper or digital formats such as text or e-mail.
WHAT ARE THE POTENTIAL PENALTIES FOR VIOLATING THE PROPOSED RULE?
While the proposed rule does not outline a penalty for violations of the rule, the FTC recently took legal action against three companies for over-restrictive non-compete agreements. Prudential Security, Inc., O-I Glass, Inc., and Ardagh Group S.A. have all been subject to the FTC’s legal actions for enforcing overly restrictive covenants on their employees. The FTC ordered the following relief:
- prohibiting the companies from enforcing or threatening to enforce non-competes against relevant employees;
- banning the companies from communicating to all pertinent employees or other employers that the employee is subject to a non-compete;
- requiring the companies to void and nullify the challenged non-competes without penalizing the affected employees;
- requiring the companies to provide copies of the order to current and past employees who were subject to the challenged non-competes;
- requiring the companies to provide a copy of the complaint and order to current and future directors, officers, and employees of the companies who are responsible for hiring and recruiting; and
- requiring the companies, for the next ten years, to provide clear and conspicuous notice to any new relevant employees that they (1) may freely seek or accept a job with any company or person, (2) run their own business, or (3) compete with them at any time following their employment.
These lawsuits demonstrate the kind of relief companies who violate the proposed rule might anticipate. However, the FTC may also draft additional punitive measures to discourage employers from violating the proposed rule.
OTHER CONSIDERATIONS FOR EMPLOYERS
If the proposed rule by the FTC is promulgated, employers should consider how the lack of a non-compete may affect their business. It will be pertinent for employers to consider their hiring strategies and look at the quality of their business. This may require employers to offer more competitive wages or benefits so that their employees are not tempted to seek employment elsewhere.
CONCLUSION
The Federal Trade Commission (FTC) and Supreme Court may be effectuating rules that can significantly change labor laws in the United States. As a result, it is incredibly important that employers stay aware of changes to pertinent laws so they may avoid potential violations.
This article highlights some of the important legal issues for employers to consider. In particular, employers with non-compete agreements should prepare to rescind their non-compete agreements if the FTC’s proposed rule is promulgated. This may require employers to hire attorneys to look at their other restrictive covenants to see if they may be considered de facto non-compete clauses.
If you have any questions about how this rule may impact you or your business, contact us today for a free consultation.
