KEN KIRSCHENBAUM, ESQ ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE You can read all of our articles on our website. Having trouble getting our emails? Change your spam controls and whitelist ken@kirschenbaumesq.com ****************************** Are non-compete provisions in employment agreements dead January 17, 2023 *********************** Are non-compete provisions in employment agreements dead ********************** Ken I thought you would find this proposal by the Federal Trade Commission interesting. Daniel W. Budinoff Security Specialists ******************** Response ******************* One of the most sought after provisions in the employment agreement is the non-compete provision. That provision is intended to protect the employer from unfair competition. The provision is reluctantly enforced by Judges and only when strictly construed and necessary for the protection of the employer and not unnecessarily limiting to the employee. California all but outlaws the provision. As of now this is only a proposal by the FTC and the FTC is asking for comment from the public. As an employer you might want to send in your comment. If this becomes law of the land employers will need to find other ways to incentivize their employees to remain in employment; we will have to figure out other provisions to protect employer rights. Obviously a departing employee cannot take any employer records, and that might be the hook employers will have to hang their hat on when seeking to prevent unfair competition. We may also have to dust off the cases on tortious interference. And you want to know why your contracts need updating so often. Seems like someone somewhere is always hard to complicate your operations. ******************* This is directly from the FTC [spacing editing]: ********************* About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities. A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas. The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed. Proposed Rule The Federal Trade Commission proposes to add a new subchapter J, consisting of part 910, to chapter I in title 16 of the Code of Federal Regulations: 1. Add new subchapter J, consisting of part 910, to read as follows: Subchapter J—Rules Concerning Unfair Methods of Competition Part 910—Non-Compete Clauses § 910.1 Definitions. (a) Business entity means a partnership, corporation, association, limited liability company, or other legal entity, or a division or subsidiary thereof. (b) Non-compete clause. (1) Non-compete clause means a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. 16 CFR Part 910: Non-Compete Clause Rule Notice of Proposed Rulemaking (1.15 MB) Fact Sheet: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (253.8 KB) 1/5/23, 10:57 AM Non-Compete Clause Rulemaking | Federal Trade Commission https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking 2/4 (2) Functional test for whether a contractual term is a non-compete clause. The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. For example, the following types of contractual terms, among others, may be de facto non-compete clauses: i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer. ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker. (c) Employer means a person, as defined in 15 U.S.C. 57b-1(a)(6), that hires or contracts with a worker to work for the person. (d) Employment means work for an employer, as the term employer is defined in paragraph (c) of this section. (e) Substantial owner, substantial member, and substantial partner mean an owner, member, or partner holding at least a 25 percent ownership interest in a business entity. (f) Worker means a natural person who works, whether paid or unpaid, for an employer. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer. The term worker does not include a franchisee in the context of a franchisee-franchisor relationship; however, the term worker includes a natural person who works for the franchisee or franchisor. Noncompete clauses between franchisors and franchisees would remain subject to Federal antitrust law as well as all other applicable law. § 910.2 Unfair methods of competition. (a) Unfair methods of competition. It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause. (b) Existing non-compete clauses. (1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date. (2) Notice requirement. (A) An employer that rescinds a non-compete clause pursuant to paragraph (b)(1) of this section must provide notice to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. The employer must provide the notice to the worker in an individualized communication. The employer must provide the notice on paper or in a digital format 1/5/23, 10:57 AM Non-Compete Clause Rulemaking | Federal Trade Commission https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking 3/4 such as, for example, an email or text message. The employer must provide the notice to the worker within 45 days of rescinding the non-compete clause. (B) The employer must provide the notice to a worker who currently works for the employer. The employer must also provide the notice to a worker who formerly worked for the employer, provided that the employer has the worker’s contact information readily available. (C) The following model language constitutes notice to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker, for purposes of paragraph (b)(2)(A) of this section. An employer may also use different language, provided that the notice communicates to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a noncompete clause in your employment contract. As of DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE, the non-compete clause in your contract is no longer in effect. This means that once you stop working for EMPLOYER NAME: You may seek or accept a job with any company or any person—even if they compete with EMPLOYER NAME. You may run your own business—even if it competes with EMPLOYER NAME. You may compete with EMPLOYER NAME at any time following your employment with EMPLOYER NAME. The FTC’s new rule does not affect any other terms of your employment contract. For more information about the rule, visit https://www.ftc.gov/legal-library/browse/federal-registernotices/non-compete-clause-rulemaking. (3) Safe harbor. An employer complies with the rescission requirement in paragraph (b)(1) of this section where it provides notice to a worker pursuant to paragraph (b)(2) of this section. § 910.3 Exception. The requirements of this Part 910 shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law. § 910.4 Relation to State laws. This Part 910 shall supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with this Part 910. A State statute, regulation, order, or interpretation is not inconsistent with the provisions of this Part 910 if the protection such statute, regulation, order, or interpretation affords any worker is greater than the protection provided under this Part 910. § 910.5 Compliance date. Compliance with this Part 910 is required as of DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE. 1/5/23, 10:57 AM Non-Compete Clause Rulemaking | Federal Trade Commission https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking 4/4 Authority: 15 U.S.C. 45 and 46(g). Submit a Comment The Commission invites the public to submit comments on this proposed rule. The FTC will review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further analysis of this issue. Comments will be due 60 days after the Federal Register publishes the proposed rule. ********************** To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com *************************** To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com *************************** CONCIERGE LAWYER SERVICE PROGRAM FOR THE ALARM INDUSTRY - You can check out the program and sign up here: https://www.kirschenbaumesq.com/page/concierge or contact our Program Coordinator Stacy Spector, Esq at 516 747 6700 x 304. *********************** ALARM ARTICLES: You can always read our Articles on our website at ww.kirschenbaumesq.com/page/alarm-articles updated daily ******************** THE ALARM EXCHANGE - the alarm industries leading classified and business exchange - updated daily ************************* Wondering how much your alarm company is worth? Click here: https://www.kirschenbaumesq.com/page/what-is-my-alarm-company-worth ****************************** Getting on our Email List / Email Articles archived: Many of you are forwarding these emails to friends or asking that others be added to the list. Sign up for our daily newsletter here: Sign Up. You can read articles and order alarm contracts on our web site www.alarmcontracts.com ************************** Ken Kirschenbaum,Esq Kirschenbaum & Kirschenbaum PC Attorneys at Law 200 Garden City Plaza Garden City, NY 11530 516 747 6700 x 301 ken@kirschenbaumesq.com www.KirschenbaumEsq.com
