Michael J. “Mick” McGirr, Esq. | Phocus Law
Typically, in preparing for this article, I identify an issue or scenario unique to real estate investors and write about that. This article will be different because the topic is not especially targeted at real estate investors. The topic is actually a recent development and one of such widespread interest that I think that despite it not being real estate specific, the readers will still find it worthwhile.
Non-compete agreements are a type of ‘restrictive covenant’ entered into by employers and employees whereby the employee is limited in his/her ability to seek new employment that falls within the geographic and timeframe scope thereof. You may be familiar with the term ‘restrictive covenant,’ as restrictive covenants are found in all types of contracts. Simply put, a restrictive covenant is a clause to a contract that works to prohibit one party from doing something that the party would otherwise have the right to do absent the contract.
The most typical non-compete agreements restrict the employee from pursuing employment that is competitive to the employer during the term of employment and for a period of time thereafter within a set geographic radius of the employer’s location or where the employee worked. Most states have limitations on the maximum period of time and the maximum geographic area that a non-compete can cover. The typical non-compete language resembles something like “employee may not engage in business within a 50-mile radius of employer for a period of two years following termination of employment.”
Employers often invest heavily in training employees. The purposes of non-compete agreements are many, but a few are: 1) to protect the employer’s investment in training its employee by making it more difficult for the employee to leave; and 2) to protect the employer’s business by not allowing the employee to set up shop next door and immediately begin soliciting, using all that the employer taught the employee.
Well, non-compete agreements may quickly become a thing of the past. The Federal Trade Commission has proposed a new rule that would ban employers from imposing non-compete terms on employees. The FTC justifies this proposed rule by claiming that non-competes are exploitative, suppressing wages, hampering innovation, and blocking entrepreneurs from starting new businesses. The rule, as proposed, would eliminate all employer-employee non-competes nationwide.
There is now a public comment period on the proposed rule. As you can imagine, employers across the country are making their voices heard on the issue.
Whether you are an employer or an employee, this proposed rule is sure to impact you or many people you know. Employers claim that the proposed rule will harm the economy. Some employees and the FTC claim that the proposed rule will do the exact opposite, encouraging better wages and more entrepreneurship. The author of this blog post can see both sides, but I will surely hear the loudest arguments from my business clients who view this as a direct impairment of their ability to grow their businesses.
In addition to advising real estate investors, Phocus Law represents small- to medium-sized businesses in a wide variety of issues. If I can be of service to your business, please don’t hesitate to reach out. I can be reached by email at Mick@PhocusCompanies.com or by phone at 602-457-2191.