Non-compete agreements prevent employees from working for an employer’s competition in a given area and time. In January, the Federal Trade Commission (FTC) unveiled a rule that may prevent companies from using these agreements to limit their employees’ ability to work for a rival.

How Can a Non-Compete Agreement Impact Me?

These agreements restrict the number of potential employers a person may have, which can limit their chances for another job with higher pay and better benefits. This contractual language was first used with high-salaried executives, but even college interns and people employed to make sandwiches and deliver them have been subject to non-compete agreements. The FTC proposal covers employees, independent contractors, volunteers, and interns.

The FTC estimates banning non-compete agreements may raise wages by nearly $300 billion annually across the economy:

• One study found wages of newly hired tech workers in Hawaii went up by about 4 percent after the state banned non-competes for those workers
• In Oregon, non-competes haven’t been valid for low-wage workers since 2008. The change appears to result in better pay for hourly workers by 2 to 3 percent

A non-compete agreement restricts your rights. If you agree to one, you may be hired for the new job, but it may severely limit your ability to get a better one in the future.

Are Non-Competes Legal Under State Law?

About half of the states significantly restrict non-competes, and a small number (California, North Dakota, and Oklahoma) have made them illegal. A New Jersey court will decide if a non-compete is enforceable depending on:

• Whether the employer is protecting a legitimate business interest
• It’s not an undue burden on the employee
• It doesn’t harm the public
• It’s not overbroad in time or geography

Many states have basically the same framework.

Does a Non-Compete Clause Bind Me Because It’s in a Contract I Signed?

There’s nothing to prevent an employer from including in a contract unenforceable non-compete language. It’s up to the employee to have an attorney review the contract to find out what parts are invalid. Employees unfamiliar with the law or not hiring legal help may wrongly assume a contract provision is valid and act like it’s binding on them when it’s not.

If put into effect, the FTC proposal would try to counteract this by requiring employers to withdraw current non-compete language and inform workers they no longer apply. It would also be illegal for an employer to agree to a non-compete with an employee, or suggest to a worker they’re bound by a non-compete when they’re not.

How Do Non-Competes Impact the Economy?

Studies show, according to the New York Times, that such contract language:

• Directly affects about 20 to 45 percent of US workers in the private sector
• Holds down pay rates because changing jobs typically means higher pay
• May be a factor why income for middle-income workers has stagnated in recent decades
• Protects established companies from start-ups
• Reduces competition within industries
• May harm productivity by making it more difficult to hire employees who fit their needs
• Imposes costs on employers seeking to hire people subject to non-competes. They may consult with legal counsel to determine if they’re binding, defend lawsuits by the former employer, and delay filling open positions

Supporters of non-compete agreements claim employers won’t invest as much into employees if they might work for a competitor. One way to address this is contract language requiring a former employee to refrain from discussing the ex-employer’s trade secrets, intellectual property, or confidential information (a confidentiality agreement). On the other hand, employee advocates say that companies should be required to pay employees who have to sit out their non-compete term.  If their non-competition is so important, say these advocates, then the companies should be willing to pay their former employees for their time away from the competitive marketplace. A bill has been introduced in the NJ Legislature for just such relief.  It is pending.

What’s the Process to Make This Proposal Binding?

The FTC announced a 60-day period where interested parties can comment on the proposal, which runs out on March 20. After the comment period, the FTC may move to make it final or change its language. The rule could take effect 180 days after the final version is published, but it could be tied up in legal challenges by employers and industry groups for months, if not years.

They may argue the FTC can’t use the statute they cite as a basis for a new regulation because it was never meant to allow such a wide-ranging proposal, which should have Congressional approval before being enforced.

Get Help From Attorneys You Can Trust

Do you have questions about contract language you’ve already signed, or because your employer wants you to consent to a non-compete agreement? Contact Kingston Law Group’s employment law attorneys by calling us at 609-683-7400, or contact us online today.  You need to know your rights, how a non-compete agreement will affect you, and whether you have grounds to disregard it.

We will schedule a near-term and reduced fee initial consultation with you at our Central Jersey law offices in Princeton.  We are compassionate counsel and tough advocates.  We will listen to your facts, explain the law, and help you find a pathway to economic and social justice.  We will vindicate your rights if they have been violated. Call today. You will be glad you did.