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Employment: Strong rejection of non-compete clauses in North America




Non-compete clauses are the most questioned in North American labor law. However, for employers who implement them in the contracts they make their employees and third parties related to their businesses sign, the situations of application of these clauses multiply, becoming increasingly specific to prevent unfair competition. The legal ecosystem of these clauses has not ceased to alter, imposing constant review and updating by both regulatory agencies and company lawyers.

Non-compete in the crosshairs of regulatory agencies. In the United States, two agencies are actively regulating most non-compete situations as more and more states join in banning these clauses. The Federal Trade Commission (FTC) reported in February that one-fifth of American workers, 30 million people, are contractually bound by a non-compete clause prohibiting them from working for another employer in the same market or starting their own business. The FTC proposed prohibiting employers from establishing these clauses in labor contracts and asked them to rescind the current ones to increase workers' salaries by $2.7 billion by proposing alternative clauses that do not affect free competition.

In addition. The National Labor Relations Board (NLRB) announced in its Memorandum 23-08 of May 30 of last year that non-compete agreements can only be applied in special circumstances that justify the violation of workers' rights because the intention to avoid competition is not framed as a legitimate interest. While the memorandum deals only with a recommendation, the provision authorizes the board's regional offices to collect information about the type of clauses implemented in contracts by employers through the employees themselves, who will surely raise questions and complain. The memorandum's exceptions apply to hierarchical employees, statutorily designated supervisors, self-employed workers and related businesses. However, the NLRB general counsel understands that the non-compete agreement hurts the rights of workers collectively, affecting the possibility of unionizing, bargaining, and their mutual protection.

Exhaust valves and new state rules. Initially, it is advisable to analyze how non-compete clauses are effectively applied to non-hierarchical employees, because many times their contractual implementation is lacking given that they lack real access to the property protected by the employer. Secondly, companies can develop an appropriate protection mechanism that includes the justification of non-competition so as to leave no possible evidence of the uselessness of these clauses. Third, it would be advisable to document the specific justifications for each business as support for possible written restrictions in the work environment, recording the damage that can be caused to the company through unfair competitive conduct for a reasonable period of time.

California, Colorado, New York, Minnesota, North Dakota and Oklahoma, among other states, have passed laws prohibiting non-compete clauses with few exceptions. In August 2023, California adds to its prohibition the authorization of the employee to claim attorneys' fees in challenging these clauses during negotiation and for challenging employment contracts. Some of these prohibitions categorize protected contracts as below U$D 100,000 annually, others require justifications along with the temporal and territorial limitation for their application.

Entrepreneurs must prepare a file of evidence to defend themselves in the event that their clauses are declared illegal, protect their interests by timely registering their intellectual rights, in particular, those rights considered as “trade secrets” that depend on a written preparation of manuals or regulations for workers within the company.

Training workers is also an efficient practice that allows us to complete dark competition situations, especially in the exchange between employees and clients or business associates. The implementation of interviews with employees after work also serves as support to understand the legal risks of taking information outside the company, even without knowing it.

Agreements between businessmen prohibited. In Canada, “non-poaching” agreements are prohibited by the Competition Act and any agreement between competing employers not to hire reciprocal employees constitutes an offense punishable by up to fourteen years in prison. However, Ontario is the only Canadian province that since 2012 (Working for Workers Act) has restricted the inclusion of non-compete clauses in employment contracts. The Supreme Court maintains a principle of non-enforceability of such clauses for more than two years from the termination of employment and a territorial limitation restricted to the effective operating radius of the business that constitutes the actual workplace.

In the United States in 2016, horizontal non-poaching agreements were closely examined by the FTC and the Department of Justice at the federal level, while California, Illinois, Maryland, Minnesota, New Jersey, New York and Oregon launched precise investigations into the industry of fast-food. Companies that violate the ban on such clauses also face severe financial and criminal penalties.

The future of non-competition. From contractual practice and from individual or collective negotiations with employees, from the moment of selection for hiring it is suggested:

  • Eliminate non-competition clauses with low-paid employees except in circumstances that justify it. These cases are the most controversial and regulatory controlled.

  • Determine and specify exactly the scope of non-competence to establish the justification parameters that in many cases are very precise and do not need a generic clause to cover them. Indeed, generic non-compete clauses are the most fragile and most challengeable.

  • Take care of the relationship with competitors to avoid tacit non-poaching agreements or confusing situations that could be interpreted as a prohibition against hiring the competitor's employees. The challenges of competition between companies are well known. Business owners have this real and current knowledge so that a tacit non-poaching agreement is not inferred from their behavior. For this, one of the best proofs is the hiring of the competitor's employees at some point as real proof that there is no intention to engage in criminal conduct of that type.

  • Consider compensation alternatives that avoid unfair competition, such as modifying annual bonus programs, their conditions of receipt, establishing transitions with employees that allow them to correct damage caused to the competition by them, returning intellectual property confirming its potential misuse and ensuring that no harm has been caused to the company. Improve training to better understand the specific value of trade secrets, reducing any possibility of damage in exchange for authorizing the possibility of subsequent repair.

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