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Competition Heats Up As Non-competes May Soon Be Banned!

What employers and employees can do to protect their rights

Non-competes may be banned
Contributing Writer

Mortgage loan originators by nature are forward-thinking professionals always looking for new opportunities to improve their business. With a minor exception, MLOs are only allowed to be sponsored by one company at a time, which limits the extent of their independence. As a result, many MLOs have signed employment agreements that include non-competition or other clauses written to protect their sponsors.

A new Federal Trade Commission (FTC) rule would ban employers from using non-competition agreements. According to a press release announcing the new rule, the FTC considers these agreements to be “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”

Non-competition or non-compete agreements allow an employer to restrict or greatly reduce an employee from taking another job in direct competition with the former employer. To be enforceable, they must have a clear geographic location and time period. Generally, the shorter the time period or the smaller the geographic location, the more enforceable the agreement.

While the FTC is soliciting for public comments on the ban of non-competes, it appears it is not waiting for the comment period to end before taking action. The FTC has rescinded a 2015 antitrust policy statement that limited its authority to stop anticompetitive business tactics under Section 5 of the FTC Act. In January, the FTC took legal action against three companies, requiring them to drop the non-compete restrictions that the companies had imposed on thousands of workers. According to the FTC, each of these companies illegally imposed non-compete restrictions on workers that barred them from seeking or accepting work from competing businesses after they left the company.

“The FTC is committed to ensuring that workers have the freedom to seek higher wages and better working conditions without unfair restrictions by employers,” said Rahul Rao, deputy director of the FTC’s Bureau of Competition. “The FTC will continue to investigate, and, where appropriate, challenge non-compete restrictions and other restrictive contractual terms that harm workers and competition.”

Expensive Challenges

A mortgage loan originator who sends loans to a company other than their sponsor may be acting without a license, breaching a contract, or committing fraud; yet, it continues to happen regularly. Legal challenges are expensive, stressful, and time consuming, but at the time of this writing nearly a dozen mortgage companies are actively litigating employment issues against former employees.

Employers bear significant costs to onboard and train new employees. They also are required by the Gramm Leach Bliley Act to protect consumer’s nonpublic personal information.

Whether or not the FTC rule passes, non-competes are not necessary to protect companies. The following options may accomplish the goals while allowing the employee to continue to make a living.

 After spending the last decade drafting LO Compensation agreements, I can assure you the easiest time to decide on severance is before an employee starts working for your company. Severance agreements should be clearly laid out in employment agreements. I recommend paying a full commission for a reasonable period, followed by a partial commission. That way there is less incentive for MLOs to funnel loans to a new employer.

A nondisclosure or confidentiality agreement is a legal contract between an employer and employee that protects trade secrets. These clauses typically do not require a time limit, allowing the employer great protection of their secrets. To make these agreements stronger, identify in advance what is considered a trade secret and how it is protected during employment.

A nonsolicitation agreement is a legal contract that prohibits or restricts a former employee from contacting or soliciting clients or former coworkers after leaving their employment. Non-solicitation clauses are generally limited to a time period after employment (typically one year). This protects the company during a transition period to allow the company to solidify relationships with employees or clients.

The legal clauses mentioned above should be reviewed so that they are not so broad as to be considered a non-compete by another name as the FTC has stated that restrictions such overly broad agreements would be subject to the new rule.

Use Tech To Protect

Another important protection is information technology infrastructure, which can provide protection of trade secrets and intellectual property, including client lists, proprietary mortgage loan software, and other commercially valuable information. Investing into technology to protect your company will protect against data breaches, cybersecurity risks, and protect your clients’ information. Technology should also allow access control restrictions and may be set up to detect unusual activities. Proper IT infrastructure provides a digital trail in the event it becomes necessary to conduct a forensic audit.

Finally, employees need to read and negotiate their employment agreements before signing them and maintain their signed agreements. A true professional will review their current employment agreement before they decide to move on to ensure they are upholding their part of the agreement. On more than one occasion I have asked someone if they signed a noncompete, been told no and then received one from a former employer.

If employers and employees follow these guidelines, we can reduce the risk of future litigation by protecting an employee’s right to continue to make a living in the career of their choice and an employer’s right to protect their investment

This article was originally published in the Mortgage Women Magazine May 2023 issue.
About the author
Contributing Writer
Tyna-Minet Anderson is vice president of Mortgage Educators and Compliance.
Published on
May 12, 2023
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