Non-compete agreements hold significant sway in the world of employment-related contracts because they shape the dynamic of the relationship between employers and employees/independent contractors once their relationship ends. These agreements outline the conditions for “workers” to continue their involvement in the same industry post-employment. Using a combination of geographical boundaries and time constraints, these contracts are designed to regulate workers’ post-employment, competitive activities. Often linked with non-solicitation and confidentiality agreements, they work collectively to prevent the misuse of trade secrets or confidential information and the unlawful solicitation of clients. Central to these agreements is their role in safeguarding a company’s competitive advantage. Well-constructed non-compete agreements lay out explicit terms for the period following employment and set reasonable limits on former workers. But how exactly do they operate within the framework of employment law?
How Does a Non-compete Agreement Work?
Ohio businesses are permitted to require workers to sign non-compete agreements as a mandatory condition of employment (and continued employment), but that agreement must be reasonable. Ohio Courts have found reasonable non-compete agreements in Ohio:
- Do not impose restraint greater than what is required for the business’s protection of a legitimate interest (which has been found to include not only client lists, confidential information, and trade secrets but also skills and training acquired during and through employment);
- Do not impose undue hardship on the ex-worker (courts routinely find that not working in that field or industry for some period is not “undue hardship”); and
- Are not harmful to the public.
Navigating Reasonable Terms
Although valuable tools for businesses non-compete agreements must adhere to the concept of reasonability. Ohio courts are more likely to uphold reasonable terms of non-competition agreements. Even when courts find provisions unreasonable, such provisions can be amended to become reasonable. In determining reasonability, courts will consider, among other things:
- The geographic area of the restriction (which usually restricts the former worker from engaging in business similar to that of the employer within a certain distance from the former employer’s office or territory), the reasonableness of which will be determined based on the nature of the employer’s business;
- The duration of the prohibition on the competition (generally courts have found up to twenty-four months to be acceptable (and in some instances longer depending on the facts) and require or impose defined end dates); and
- The access to restricted and confidential trade secrets or confidential information, as employers are more concerned with limiting exiting workers with high-level access to such information.
No two cases are alike. Every Court deciding the reasonableness and enforceability of a non-compete agreement undertakes its own fact-intensive analysis, as there is no single dispositive factor for courts to consider. Through the lens of protecting its legitimate interests, the employer must prove the reasonableness of the restraint or scope of limitation, itself a sliding scale, subject to rapidly shifting norms. It may be easier for employers to protect their interests using non-solicitation and confidentiality agreements.
The Proposed FTC Ban
On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule barring employers from utilizing non-compete agreements. If passed, the rule would not only prevent the formation of new non-compete agreements but would also require employers to rescind all existing non-compete agreements and affirmatively inform all workers with such clauses that those clauses are no longer enforceable. If passed, the FTC estimates wages will increase by almost $300 billion nationwide as approximately 30 million workers across the United States are subject to non-compete agreements.
The FTC views non-compete agreements as “unfair methods of competition” that reduce wages and stifle the workforce. Accordingly, the proposed rule also includes a “functional test” that prohibits any contractual provision restraining the employee from pursuing or agreeing to work with another individual or engaging in business activities once their tenure with the current employer concludes. The FTC proposed rule still needs to be enacted and, if enacted, will undoubtedly face subsequent judicial challenge and scrutiny.
Balancing Recruitment and Protection
Enacting rules allowing businesses to recruit more workers seems to be a growing trend. Over the last few years, almost 40% of the states in the United States have enacted legislation restricting or eliminating non-compete agreements or have legislation seeking such restrictions before their legislatures.
The national and statewide legal landscape regarding non-competition agreements is rapidly developing. In addition to the above, some nuances accompany non-compete agreements, such as the potential ramifications of presenting a non-compete agreement to an existing employee and what it means to the relationship moving forward.
It is crucial for employers to decide what they want to protect and the best way to protect it using the least restrictive means. Narrowly tailoring a non-compete agreement may seem counterintuitive, but it will allow employers to retain the most protection and control of their interest and work product post-employment relationship. Using non-solicitation and confidentiality agreements may be a more effective way employers can protect themselves. If non-compete agreements are ultimately void as against public policy per the proposed FTC ban, a business would be wise to develop strong non-solicitation, and confidentiality agreements to ensure former workers do not use their trade secrets and confidential information to unfairly compete.
Navigating the intricacies of non-compete agreements and their evolving applicability can be complex. If you have questions or want further insights tailored to your unique situation, contact your trusted CPM attorney or any member of our business law group today. Our dedicated team of legal experts are here to help.