Businesses often need to integrate very specific terms into their employment contracts. They must clarify what they expect from workers, what compensation the workers may receive and what disciplinary practices the company employs. Organizations also frequently add restrictive covenants to their employment contracts.
Non-solicitation, non-disclosure and non-compete agreements are among the most common restrictive covenants used in employment contracts. These prevent workers from starting competing businesses, disclosing trade secrets or trying to do business with those currently working with their employers. However, workers and the organizations that represent them have begun pushing back on restrictive covenants in employment contracts.
There have been attempts to end their use. Most recently, the Federal Trade Commission (FTC) announced a ban on non-compete agreements in employment contracts. All of that furor may leave leadership within organizations wondering if their employment contracts are still enforceable. The good news for those companies is that restrictive covenants are still typically enforceable.
Non-compete agreements remain legal
After the announced FTC ban made waves early in 2024, several lawsuits made their way into federal court. A judge in Texas issued a ruling effectively declaring the ban unconstitutional as it represented an overreach of the FTC’s authority. Therefore, the ban never actually took effect.
Non-compete agreements and other restrictive covenants remain completely enforceable provided that the contract itself is valid. Employers can still take legal action against former employers who engage in economic behavior that could harm the company after leaving their jobs.
Restrictive covenants should have clear limitations regarding how long the company can enforce them and the geographic area to which they apply. Additionally, workers usually need to have received something of valuable consideration for employers to limit their activity outside of work and after leaving their position.
Organizations can still initiate litigation to enforce their contracts when workers go on to take jobs with competitors or start a business in the same industry. They may even want to expand their contracts to include more limitations given the ease of sharing information online and how leaked trade secrets could hurt the business.
Pursuing litigation against a former employee for violating a contract can help protect trade secrets and deter other workers from attempting to unfairly compete with a former employer. The courts are empowered to issue an injunction forbidding unfair competition, enforce penalty clauses and even award employers damages, depending on the circumstances.
