Austin TX Business Law Blog

Thursday, July 21, 2016

Non-Compete Clauses Under Scrutiny

Should my business include non-compete provisions in its employment agreement?

Many businesses rely on non-compete provisions in employment agreements to prevent job changing employees from taking proprietary information to competitors. These provisions allow trade secrets and other sensitive information to be shared with insiders while minimizing the risk that the information will be misappropriated.  In light of a recent report by the White House, however, the use and effects of non-competes are being questioned.

Some employment law observers argue that these provisions unfairly restrict employees' mobility and their ability to advance in their field. Moreover, state and federal regulators are becoming increasingly concerned that these provisions are being used inappropriately for low wage workers who do not have access to sensitive information.

What is a non-compete provision?

A non-compete clause is a restrictive covenant that prevents employees from working with a business's competitors after resigning or termination. The term can range from 6 months to 2 years, and the provisions often specify the geographical region where the business operates.  While non-compete provisions have traditionally been included in employment agreements for executives and other key people, these covenants are increasingly being used in a wide range of industries with lower-level employees.

However, non-compete provisions have recently come under scrutiny by state attorneys general in New York and Illinois.  Moreover some states limit the use of these provisions while non-competes are invalid in a handful of states. In addition, Congressional lawmakers had considered legislation in 2015 that would prohibit non-competes for lower wage employees, but no action has been taken on the measure.

The White House report that was released in May 2016 found that non-competes can hinder workers' ability to negotiate for better pay, benefits and working conditions, prevent them from switching jobs in order to move ahead, or result in unemployment when a worker leaves and cannot find a job that meet the requirements of the non-compete provision.

Whether the Department of Labor or state authorities will take any action to restrict the use of non-compete provisions remains to be seen. Meanwhile, one alternative for employers is to rely on confidentiality provisions that are designed to protect trade secrets. If your business wants to minimize the risk of a lawsuit under state labor laws, an experienced business law attorney can help you put in place a well thought out employment agreement.

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