Exploring Alternatives to Non-Compete Agreements

Employers have long used non-compete agreements to protect their intellectual property and competitive advantage. However, they are illegal in some states and are often criticized because they can be broadly constructed in ways that restrict an employee’s future employment options and keep them from leaving their current employer. In a survey conducted by ASHA of audiologists and SLPs, respondents provided key insights that reinforced the complex nature of regulating these agreements.

The Federal Trade Commission (FTC) defines non-compete agreements as clauses in employment contracts that restrict a worker from working for a competing entity, or starting their own competing business, within a certain geographic area and/or period of time after their employment ends. They have proposed a rule [PDF] that would universally ban the use of non-compete clauses in employment contracts across all industries. The proposed rule, announced by the FTC in January 2023, is based on a preliminary finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The FTC’s new rule would make it illegal for an employer to:

Enter into or attempt to enter into a non-compete with a worker.
Maintain a non-compete with a worker.
Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.

The rule has yet to be finalized; if it is, it will likely be challenged in the courts and implementation could be significantly delayed.

Fortunately, several alternatives to non-compete agreements strike a balance between safeguarding businesses and promoting a fair and open job market. This resource will explore three viable options:

non-disclosure agreements (NDAs),
non-solicitation agreements, and
“clawbacks” for paid training and education.

Non-Disclosure Agreements (NDAs)

One concern of employers is that former employees may take proprietary materials (e.g., practice management tactics, written resources, innovative treatment techniques) to use in another practice. Non-disclosure agreements are contracts designed to protect confidential information, trade secrets, and proprietary knowledge. By signing an NDA, employees agree to keep sensitive information confidential during and after employment.

If you develop an NDA, it should contain a clear definition of “confidential information.” The definition can include client names, prospective client information, pricing, financial information, information about other employees and their compensation, and intellectual property.

Advantages:

Flexibility: Unlike non-compete agreements , NDAs do not restrict employees from working for competitors or starting their own ventures. They focus solely on protecting confidential information, allowing individuals to pursue their careers freely.
Trade Secret Protection: NDAs can effectively safeguard an employer’s trade secrets without imposing broad restrictions on employees’ future employment opportunities.

Limitations:

Enforceability: The effectiveness of NDAs depends on their enforceability. Proving a breach of confidentiality can be challenging as it requires substantial evidence.
Restricted Scope: NDAs protect only confidential information, leaving employers vulnerable to employees utilizing general knowledge and skills gained during their tenure as an employee.

Non-Solicitation Agreements

Concern that a former employee would take clients with them is the primary reason ASHA members cite for using non-compete agreements. Non-solicitation agreements focus on preventing employees from soliciting clients, customers, or other employees. These agreements restrict individuals from actively enticing business away from their former employer to their new venture.

Advantages:

Employee Mobility: Non-solicitation agreements allow employees to change jobs freely.
Client Protection: By prohibiting the poaching of clients, non-solicitation agreements safeguard the former employer’s interests without impeding employees’ career growth.

Limitations:

Ambiguity: Determining what constitutes solicitation can be subjective, leading to potential disputes and legal complexities.
Competition: A non-solicitation agreement only prohibits an employee from soliciting your employees or customers. It does not prevent them from competing with you if they are not soliciting your employees or customers.

“Clawbacks” for Paid Training and Education

Educational and training assistance can be an excellent tool to recruit employees and develop their talents. If you have an educational assistance program, the amount paid by the employer can be tax-deductible for the company and not considered taxable income for the employee. Section 127 of the Internal Revenue Code [PDF] allows an employee to exclude from income up to $5,250 per year (subject to change) in employer-provided assistance with tuition, fees, books and certain supplies for course instruction or training. If an employer chooses to provide assistance under Section 127, the benefit must be offered to all employees on a nondiscriminatory basis that does not favor highly compensated employees.

Clawbacks involve reclaiming funds invested in an employee’s training or education when they leave the company within a specified period.

Advantages:

Fairness: Clawbacks provide a mechanism to recover costs associated with specialized training or education if an employee leaves shortly after completion.
Incentive for Retention: By implementing clawback provisions, employers can incentivize employees to stay for a certain period, ensuring a return on investment.

Limitations:

Difficulty in Calculation: Determining the appropriate amount to clawback can be challenging, as it requires accounting for the value gained by the employee during their tenure.

All three options described above must be thoughtfully designed to comply with local, state, and federal employment laws and regulations. While you can find templates online, it is best to consult with an attorney familiar with your state’s laws.

As employers seek alternatives to non-compete agreements, it is crucial to balance protecting legitimate business interests and promoting employee mobility and innovation. Even if the FTC’s ban does not take effect, all the recent publicity surrounding non-compete agreements may make it more difficult for employers to recruit ideal employees if they use them. Non-disclosure agreements, non-solicitation agreements, and clawbacks for paid training and education offer viable options to safeguard a business’s clients, intellectual property, and investment in employee education. By leveraging these alternatives to non-compete agreements, employers can support a fair and competitive job market that fosters innovation while respecting the interests of both parties involved.

Employees faced with the prospect of a non-compete agreement as a condition of employment should consider engaging in open and constructive discussions about these alternatives to foster a more collaborative and mutually beneficial employment agreement. By proactively suggesting alternative provisions that protect both the employer's interests and the employee's career prospects, individuals can contribute to shaping a more balanced and flexible employment landscape . For additional contract considerations, see Non-Compete Agreements: Contract Considerations for Audiologists and Speech-Language Pathologists.