Federal Trade Commission Moves to bar Noncompete Agreements in Labor Contracts
The Federal Trade Commission (“FTC”) is proposing a rule that would ban companies from imposing non-compete clauses on workers in the United States, and render void all existing post-employment noncompete agreements.
Noncompete agreements are used to prevent workers from leaving their employment to work for a competitor or start a competing business typically for a specified period of time in a certain geographic area. Currently, noncompete agreements are used in almost every profession from hospitality to construction to specialized industries like doctors, dentists and software engineers.
Some reasons proposed by the FTC for the need to ban the use of noncompete agreements point to the stagnant pay for middle-income workers over the last several decades, the prevention of start-up companies from competing with established organizations and a potential harm on productivity making it hard for organizations to hire the necessary specialized talent. “Because noncompete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject them as well as workers who are not” notes the FTC plan.
As it currently stands, about half the states significantly constrain the use of noncompetes, and a small number have already deemed them largely unenforceable. Even in such states, companies often include noncompete language in employment contracts. As a result, many workers turn down job offers, in some cases, as a result of the provisions simply due to the fact that many workers are not aware the provisions are unenforceable.
The proposal appears to address this issue by requiring employers to withdraw existing noncompetes and to inform workers they are no longer applicable. The proposal would also make it illegal for an employer to enter into a noncompete with a worker or to try to do so, or to suggest that a worker is bound by a noncompete when they are not.
It is important to note, this proposed ban on noncompetes doesn’t just apply to employees but also independent contractors, interns, volunteers and other workers.
Defenders of noncompetes state that a ban ignores the fact that, when used appropriately, noncompete agreements are an important tool in fostering innovation. It makes companies more likely to invest in training and share sensitive information with personnel which they might otherwise withhold if they feared the employee may quickly leave.
The public will be allowed to submit comments on the proposal for 60 days after which the agency will move to make it final. Although the FTC claims the rule would take effect 180 days after the final version is published, it is likely to face legal challenges. Opponents of the rule will likely argue that the relevant federal statute is too vague to guide the agency in putting forth a rule banning noncompetes, and the evidence the agency has on their effects is still too limited to support a rule.
With the uncertain future of noncompete agreements on the hinges, it may time to review your company's employment agreements, nondisclosure agreements and other safeguards for confidential and proprietary information. Executive Legal Services is happy to partner with you to strategically plan for the future and assess what this may mean for your organization.