When it comes to legal challenges that small business owners face, employment-related matters consistently top the list. Missteps on employment-related matters are common and can result in significant consequences for small business owners, including discrimination, harassment, and wrongful termination lawsuits; liability for unpaid wages; and penalties and fines levied by the Department of Labor, the Equal Employment Opportunity Commission, and others. To mitigate these legal risks, businesses should establish robust HR policies and procedures, provide ongoing training to staff, promptly address HR errors and personnel issues, and consult with legal counsel to ensure compliance with employment laws.
This guide discusses some of the most significant, recent changes to employment law and offers tips for safeguarding your business. First, I review proposed changes to non-competition and non-solicitation restrictions, as well as enacted changes to confidentiality and non-disparagement clauses. Secondly, I emphasize the importance of risk management through regular contract review and maintenance of an up-to-date employee handbook.
The Shifting Rules on Non-Compete Agreements
Protecting valuable, confidential information is a key imperative of any competitive business. Proprietary information can include client lists, contact information, strategic planning, or other sensitive, valuable information. Historically, businesses have used varied techniques to protect proprietary information. Sometimes those efforts look like non-compete agreements that restrict competition, solicitation, employee or customer-poaching, or disclosure of information. The legal landscape of what a business can and cannot do to protect itself is always shifting, however, and employers should be mindful of the significant changes that have occurred in just the last year on these issues.
As you may have seen, the Federal Trade Commission declared earlier this year an intent to impose a nationwide rule that essentially forbids non-competition and non-solicitation clauses. Such clauses have become a mainstay of employment law and are a common tool used by employers to protect client relationships and information from would-be poaching exiting employees.
First, keep in mind that the FTC’s process for imposing a rule is lengthy, and includes a time period for the public to “comment” on the proposed rule before the agency officially votes it into effect. As of today, the vote to ban non-compete agreements has already been delayed once, until April 2024, because the agency received an avalanche of public comments – nearly 27,000.
Thus, the current signal is that the FTC has decided to move slowly with this process, likely because it knows that – whenever it goes into effect and whatever the final rule says – it will almost certainly be challenged in court by employers or their trade groups seeking to retain the ability to enforce non-competes. While we cannot predict the future, a reasonable guess is that this litigation would be initially filed in a jurisdiction with a reputation for being “employer-friendly.” Then, no matter who wins in that court, another reasonable guess is that there would be subsequent appeals, including up to the United States Supreme Court, to determine if the FTC is even allowed to ban non-competes in the first place.
At this point, it makes sense for employers to take stock of their current non-competition and non-solicitation agreements, to at least be sure that they have them in place where needed. As part of that process, it’s a good time to review the scope of the non-competes (how big the geographic area is, how long the restriction lasts) to make sure they are enforceable under your state’s law. Also, your employee handbook should be reviewed thoroughly to make sure the employer has the necessary trade secret protection language should non-compete and non-solicit agreements do, in fact, become illegal. Such policies should define what, specifically, the employer deems to sensitive and proprietary and should also outline the expectations of employees as to maintaining its secrecy.
Confidentiality and Non-Disparagement Clauses
As long as they are considering (or revisiting) their active employee agreements, employers should also review the severance terms they offer to outgoing employees. Earlier this year, the National Labor Relations Board surprised the legal community by announcing that an employer’s mere offer of a severance agreement that includes “confidentiality” and “non-disparagement” clauses – long considered to be standard fare for severance agreements – violates the National Labor Relations Act. While the NLRA is typically discussed in the unionized-employee context, the law applies to all employees, union or otherwise, meaning the NLRB’s decision has a broad impact. The reasoning behind it is that, under the law, employees have the protected right to act together to protect their mutual interests. If an employer coerces employees (or former employees) to refrain from candidly discussing, for example, work conditions, then it is interfering with the NLRA’s protections.
In other words, if an employer’s severance agreement says that the former employee cannot “disparage or harm the image of [the] employer” – this is technically a violation of the NLRA.
Similarly, while confidentiality clauses have long been a tool to keep private the amount of any severance offered to a former employee, the NLRB found that broad confidentiality clauses prevent employees from discussing employment terms with fellow coworkers. The NLRB has since emphasized that while severance agreements are still lawful, they should no longer have their previously-standard boilerplate language about confidentiality and non-disparagement, but should instead be narrowly tailored to avoid running afoul of the agency’s decision. Such tailoring could clarify whether components of the agreement qualify for trade secret protection, identify specific areas of confidentiality unrelated to an employee’s ability to work in concert with coworkers, or impose specified penalties for the dissemination of false negative information about the company.
Employee Handbooks
Even if the above-described concerns don’t apply to your business, any company should strongly consider protecting itself by creating, and enforcing, a simple, efficient employee handbook. While these can be useful tools for communicating messages about corporate history, culture, and values, they also provide legal protection in a number of circumstances. For example, should an employee ever pursue a claim against the business through one of the many government administrative agencies (OSHA, Department of Labor, Equal Employment Opportunity Commission, etc.), one of the first things that agency will want to see is your employee handbook. If you do not have one, the agency may (right or wrong) presume that this employer does not take seriously the laws and regulations protecting employees.
In addition to showing earnest legal compliance, a good handbook can actually protect the business wholesale against certain claims. For example, when an employee raises a claim of sexual harassment, the employer can, in many circumstances, avoid liability for the claim by showing that (1) it exercised reasonable care to prevent and correct harassing behavior (when it was brought to the employer’s attention) and (2) the employee unreasonably failed to take advantage of opportunities provided by the employer to prevent or correct this harm. Therefore, if the business can show that it has a harassment prevention policy, provided that policy to the employee, and the employee did not follow it, then the employer avoids liability altogether.
Similarly, while even well-intentioned employers can run afoul of the complex wage and hour laws governing employees, a good handbook (with a pay discrepancy and hourly reporting policy) can neutralize many claims before they even begin, thereby preventing costly class actions and Department of Labor investigations.
Key Takeaways
- Keep track of employment contracts containing non-competition and non-solicitation restrictions and stay abreast of legal changes in this area. Consider keeping an employment attorney on retainer to update these contracts when required.
- Consult an employment attorney if you are unsure if your employee handbook has the necessary trade secret protection language should non-compete and non-solicit agreements do, in fact, become illegal.
- If you are concerned that your company’s severance policies may violate confidentiality and non-disparagement clauses, you should consult an employment attorney to have your agreements reviewed.
- Maintain a comprehensive and up-to-date employee handbook that clearly outlines employment, harassment, and hiring policies.
For more information or to seek counsel from our employment law attorneys, please reach out to request a consultation or call us at 216-696-1422.
