Exploring Alternatives to Non-Compete Contracts

Person signing a non-compete contract

Non-compete contracts have become a standard practice for many businesses in recent years, but recently the FTC has proposed that they be banned. It’s felt that these contracts protect a company’s trade secrets and confidential information by preventing employees from working for a competitor for a certain period of time after leaving their current position. But do they? Non-compete contracts are criticized for limiting employee mobility and innovation. In their press release, the FTC also takes that position.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Fortunately, there are several alternatives to non-compete contracts that can still protect a company’s interests while allowing employees to seek new opportunities. Here are some alternatives to consider:

Non-solicitation agreements: This type of agreement prohibits employees from soliciting the company’s clients or customers for a certain period of time after leaving the company. Non-solicitation agreements are less restrictive than non-compete contracts and can still protect a company’s customer relationships.

Non-disclosure agreements: These agreements require employees to keep confidential information private even after they leave the company. Non-disclosure agreements can be used in conjunction with non-solicitation agreements to protect a company’s intellectual property.

Garden leave clauses: These clauses require employees to give a certain amount of notice before leaving the company and then pay the employee to stay away from work during that notice period. This allows the company to protect its trade secrets and customer relationships while still compensating the employee.

Training and development programs: By investing in employee training and development, companies can create a more skilled workforce that is less likely to leave for a competitor. This can also help companies build stronger relationships with their employees, reducing the need for restrictive contracts.

Flexible working arrangements: Offering flexible working arrangements, such as telecommuting or reduced hours, can help companies retain employees who might otherwise leave for a competitor. This can be especially important for employees who have skills that are in high demand.

It’s important to note that these alternatives may not be appropriate for every situation. Companies should carefully consider their specific needs and consult with legal counsel before implementing any new policies. However, by exploring alternatives to non-compete contracts, companies can create a more supportive and innovative work environment while still protecting their trade secrets and confidential information.

Regarding the FTC proposal to ban non-compete agreements, the Notice of Proposed Rulemaking invites the public to submit comments on the proposed rule. The FTC will review all comments and may make changes, in a final rule, based on further analysis of this issue. The comment period is open until April 19, 2023.

The FTC’s proposed rule would generally prohibit employers from using noncompete clauses and would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.