Are Noncompete Agreements Dead?
Are Noncompete Agreements Dead?
The Federal Trade Commission is considering a rule that would ban noncompete agreements, which are contracts that prevent employees from working for a competitor after leaving a job. Proponents argue that these agreements stifle competition and limit workers' ability to find new employment opportunities. But opponents say that they're necessary to protect businesses and trade secrets. So, which side is right? Let's dive in and find out.
On January 5, 2023, the Federal Trade Commission released a Notice of Proposed Rulemaking (NPRM) to prohibit employers from imposing noncompete clauses on workers.
Noncompete clauses are contractual terms that prevent workers from working for a competitor or starting a competing business for a certain period of time after leaving their current employer. The FTC's proposed rule would generally prohibit the use of such clauses, including for independent contractors and anyone who is not an employee.
While the proposed rule is not yet in effect, it is important for businesses to be aware of this development and to consider the potential impact it could have on their employment practices. We advise you to review your existing employment contracts and consult with legal counsel to ensure that your agreements are compliant with any new rules or regulations that may be implemented.
The Federal Trade Commission has
put forth a proposal
to disallow employers from using noncompetes with their employees. This practice is commonplace, but they can take advantage of workers, suppress wages, stifle innovation, and prevent entrepreneurs from launching new businesses. The agency believes that, by prohibiting such a practice, the proposed rule could potentially lead to a $300 billion yearly increase in wages and open up job opportunities for 30 million Americans.
The FTC rule would ban employers from imposing noncompete clauses on their workers, with the aim of increasing job mobility and promoting fair competition.
In addition to prohibiting employers from entering into non-compete clauses with workers starting on the rule’s compliance date, the proposed rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date. The proposed rule would also require an employer rescinding a non-compete clause to provide notice to the worker that the worker’s non-compete clause is no longer in effect.
To facilitate compliance, the proposed rule would
(1) include model language that would satisfy this notice requirement and
(2) establish a safe harbor whereby an employer would satisfy the rule’s requirement to rescind existing non-compete clauses where it provides the worker with a notice that complies with this notice requirement.
The proposed rule would include a limited exception for non-compete clauses between the seller and buyer of a business. This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in a business entity. Text would clarify that non-compete clauses covered by this exception would remain subject to federal antitrust law as well as all other applicable law.
The FTC has invited public opinion on a proposed rule that has been established on the basis of a preliminary conclusion that noncompetes are an unjust practice of competition, thus contravening Section 5 of the Federal Trade Commission Act. Comments on the proposal can be submitted. The public is encouraged to express their opinion on the proposed rule by submitting comments on the FTC website before April 19, 2023.
This proposed rule from the FTC is in line with their new policy statement to reinvigorate Section 5 of the FTC Act, which prohibits unfair methods of competition. The FTC has recently used this power to prohibit companies from demanding onerous noncompete agreements from their workers, like the Michigan security guard company and its executives. It also ordered two large glass container manufacturers to stop using noncompetes since they block competition and hamper new businesses from finding the right employees. This NPRM and their enforcement actions are part of the agency's broader initiative to use all of their resources to ensure fair competition in the labor market.
Various job levels and industries, such as hairstylists, warehouse workers, physicians, and executives, are required to sign noncompete agreements by their employers. Unfortunately, this is often done through the use of the employer's leverage over the employee. Noncompetes interfere with the competition of labor markets by stopping workers from gaining better chances, as well as stopping employers from hiring the most competent people.
Research indicates that noncompete clauses can impede innovation and business growth in a variety of ways--stopping potential entrepreneurs from establishing competing companies and impeding personnel from bringing new ideas to different firms. This has a negative impact on customers; when there are fewer entrants to the market and greater control, they can be confronted with elevated prices--as seen in the health care sector.
The FTC is taking steps to deal with this issue through the introduction of a general prohibition against the usage of noncompete clauses. This proposed rule would make it a breach of law for an employer to do the following:
- Try to establish a noncompete agreement with an employee;
- Maintain a noncompete agreement with a worker; or
- Lead a worker to believe, in specific conditions, that they are bound by a noncompete.
This regulation would be applicable to both independent contractors and any person employed by a company, regardless of whether they are paid or not. Additionally, employers should revoke any existing noncompete clauses and inform their staff that they are no longer in effect.
The regulation likely will not encompass other work-related limitations, such as non-disclosure agreements. But, should any other employment stipulations be so encompassing that they could be interpreted as noncompetes, then they could be subject to this rule.
Lina M. Khan, Chair of the FTC, declared that having the ability to move from one job to another is a fundamental part of economic liberty and a prosperous economy. Noncompetes prevent people from taking jobs that offer better wages and working conditions. Additionally, this practice also restricts businesses from having access to the talent they require in order to grow and develop. The FTC's proposed rule, if adopted, would eliminate this practice, leading to more dynamism, creativity, and competition in the marketplace. Elizabeth Wilkins, Director of the Office of Policy Planning, commented that the proposed rule would guarantee that companies are not taking advantage of their powerful bargaining power to limit job opportunities and hinder competition.
At the Commission's meeting, votes were cast 3-1 in favor of releasing the Notice of Proposed Rulemaking, which is the FTC's initial step in their rulemaking process. Chair Khan, Commissioner Rebecca Kelly Slaughter, and Commissioner Alvaro Bedoya provided a joint
statement
. Commissioners Slaughter and Bedoya both
issued another statement . Commissioner Christine S. Wilson voted against the decision and provided her own
statement.
The FTC will assess the comments and may make modifications to the final rule according to the comments and its further analysis. Link to the FTC for information on this rule
https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
