Noncompete clauses — legal agreements preventing employees from working for competitors or starting competing companies of their own — could be a thing of the past.
This is due to a rule banning such clauses nationwide that was issued by the Federal Trade Commission last April. Noncompete provisions are utilized across industries, impacting about 30 million U.S. workers.
While several states already ban or restrict enforcement of these agreements, the proposed federal ban has sparked controversy and concern, especially within the manufacturing sector.
“The FTC’s rule banning noncompete agreements is unprecedented and threatens manufacturers’ ability to attract and retain talent,” said National Association of Manufacturers Managing Vice President of Policy Chris Netram. “In addition, [the] action puts at risk the security of intellectual property and trade secrets — anathema to an industry that accounts for 53% of all private sector R&D.”
Netram went on to share that a NAM survey found 66% of manufacturers said the ban would interfere with their operations, and nearly half said it would impact employee training programs.
“The ban could force manufacturers to revamp their human capital operations completely, enact burdensome controls or silo parts of their operations from each other, which would result in less training for employees, less collaboration, less innovation and less efficiency,” he said. “The NAM will weigh all options in response to the commission’s vote, so that well-paying manufacturing jobs and innovation are not compromised.”
Originally slated to take effect Sept. 4, the ban was temporarily blocked earlier this month by a federal judge in Texas. The case now will move through appeals, a process that could take months or even years.
Jen Fietz, the owner and CEO of Imaginasium, a Green Bay-based marketing agency for manufacturers, says most of the manufacturers with which she works use noncompete agreements to some degree, whether it’s protecting customer lists or safeguarding product designs, and still need to be aware of what is at stake.
She echoes Netram’s concerns and fears the noncompete ban could compromise talent attraction and retention efforts as well as intellectual property and trade secrets.
“We’ve had such a massive push for automation in technology in recent years. Without these agreements there’s an increased risk of sensitive information being shared with competitors, which could undermine a company’s competitive edge and the innovation they are trying to instill within their organizations,” she says. “All employers need mechanisms to safeguard their valuable intellectual assets to maintain their market position.”
That safeguard may be found in solid trade secret and confidential information nondisclosure agreements, says Steve DiTullio, attorney with DeWitt LLP Law Firm.
“Every company that I work with, manufacturing and otherwise, has generally three things they want to protect: They want to protect their information, their workforce and their customer base,” DiTullio says. “Can you effectively do all three of those without ever entering into a noncompete? The answer is yes — you protect your information through well-written, reasonable nondisclosures.
“For manufacturers that have employees doing R&D or otherwise have access to confidential information and trade secrets, having good, effective, but not overreaching nondisclosure [agreements] is the number one thing they can do to help to protect that information,” he says.
DiTullio recommends employers review their current non-solicit and nondisclosure agreements with their legal counsel. “Make sure that they are not so broad and so aggressive that they could be considered a noncompete and therefore would be banned as well,” he says. “They may need to be rewritten.”
In Wisconsin, a nondisclosure on confidential information is effective only during employment and for two years thereafter. Trade secrets are different, however, and given indefinite protection. DiTullio recommends having separate agreements in place for each.
“Particularly if you have something valuable on that trade secret side to protect, I think having two separate agreements is really smart and probably a better way to prevent problems with [a potential] FTC ban,” he says.
While DiTullio calls the FTC’s rule a “pretty aggressive ban,” there are two exceptions of which to be mindful.
“Number one, [the ban] wouldn’t have any impact on a noncompete that arose out of the sale of a company, whether that happened two months ago, is happening now or happens in the future,” he says. “The second, and very important, exception is for higher-earning senior executives making more than $151,164 a year.”
Whether or not the ban goes into effect Sept. 4 or anytime in the future, DiTullio suggests employers review all current and former employees impacted by noncompete agreements. If the ban does go through, employers are required to notify these employees about the change.
It’s also best practice for employers to routinely review their employee retention strategies to maintain a competitive advantage.
“I’m not saying that all of a sudden you start giving out bonuses left and right, but think about ways — whether it’s a health insurance benefit expansion or a bonus program — to retain your employees so that you don’t have to worry about them going to a competitor if this ban goes into place,” he says.
Fietz agrees, saying the potential for increased focus on talent retention may be the only silver lining of a noncompete ban for manufacturers.
“Any time change happens and you’re forced to look introspectively at your organization for opportunities to enhance and improve, especially as it relates to your employee base, that’s never a bad thing,” she says.
