On January 4, the USA Federal Commerce Fee (FTC) issued complaints in opposition to three employers alleging that they unlawfully imposed non-competition restrictions on staff, together with low-wage staff, that barred the workers from in search of or accepting post-termination employment with a competing enterprise. The complaints allege that the employers’ requirement that staff enter into these non-competition agreements constitutes an unfair methodology of competitors and a violation of Part 5 of the Federal Commerce Fee Act, 15 U.S.C. § 45, which prohibits unfair or misleading acts or practices in or affecting commerce.
Whereas this motion was newsworthy by itself, the next day, the FTC dropped a bombshell, asserting a brand new rule that “would ban employers from imposing noncompetes on their staff,” which may, in line with the company, “improve wages by $300 billion per yr and increase profession alternatives for about 30 million Individuals.”
The proposed rule, which will probably be open for public remark for 60 days, is premised on the FTC’s findings that noncompetition agreements are unfair strategies of competitors. Based on FTC Chair Lina Khan, noncompetition agreements “block staff from freely switching jobs, depriving them of excessive wages and higher wages and higher working situations, and depriving companies of a expertise pool that they should construct and increase.” Chair Khan defined her place that “[b]y ending this observe, the FTC’s proposed rule would promote higher dynamism, innovation, and wholesome competitors.” Though some employers could also be shocked to see the FTC weighing in on noncompetition agreements, the company has taken an more and more seen function on employment-related points in the course of the present administration (see, e.g., our dialogue of the FTC’s September 2022 announcement of its efforts to guard gig staff), contending that these actions are approved by the company’s shopper safety duties.
The FTC’s proposed rule would prohibit an employer from getting into into (or trying to enter into) a noncompetition association with a employee. The rule defines a “non-compete clause” as not solely an settlement between an employer and a employee (which, importantly, additionally consists of impartial contractors, interns, and even volunteers) that “prevents the employee from in search of or accepting employment with an individual, or working a enterprise, after the conclusion of the employee’s employment with the employer,” but additionally any settlement that has the purposeful impact of that type of restriction. Thus, below the rule, a broad non-disclosure settlement that successfully precludes a employee from working in the identical area after the conclusion of the employee’s employment additionally could be illegal. So too could be an settlement between an employer and a employee that requires the employee to pay again coaching prices if the employee’s employment terminates inside a sure time frame, the place the prices will not be fairly associated to these truly incurred by the employer. The one exception offered for within the proposed rule pertains to non-competition preparations entered into in reference to the sale of a enterprise the place the particular person restricted owns at the least a 25% curiosity within the enterprise being offered.
Notably, the rule wouldn’t solely prohibit noncompetition agreements going ahead, however would additionally invalidate any present noncompetition agreements. In reality, the rule would require employers to supply discover to staff with present noncompetition agreements that these agreements are not in impact and can’t be enforced in opposition to them.
A number of states, most notably California, already prohibit employment-related non-competition agreements in most circumstances. Different states place limitations on using employment-related non-competes, corresponding to Illinois’ limitation on their use with low-wage staff. Different states have joined a rising nationwide development putting restrictions on using noncompetition agreements in employment (see, e.g., our dialogue of latest Colorado laws on this space). Nevertheless, the proposed rule would create a nationwide normal, because it expressly supplies that it might supersede all state legal guidelines which might be inconsistent with the rule.
As proposed, the rule would go into impact 180 days after the publication of the ultimate rule. Intensive public feedback are sure to be made, as is strident opposition to the proposed rule. We are going to proceed to watch and replace as developments come up.