The FTC Proposes to Ban Employment Non-Compete Clauses
As also published in Leasing News
To welcome in the new year in its inimitable way, the Federal Trade Commission (“FTC”) proposed new rules that would ban employers from imposing non-compete on their employees. If passed, the new rule would provide that it is an “unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with an employee, to maintain a worker with a non-compete clause, or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”
Per the FTC, a non-compete clause is a “contractual term between an employer and a worker that typically blocks the worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.” As such, these clauses have historically been considered appropriate subjects for scrutiny under the nation’s antitrust laws such as the Sherman Act.
The prospective change in federal law was prompted by what the FTC calls “natural experiments” by virtue of new legislation in several states that limit or ban non-competes. Non-competes are either entirely or largely unenforceable as against public policy in California, North Dakota, the District of Columbia, and Oklahoma. Maine, Maryland, New Hampshire, Rhode Island, Washington and most recently, Colorado, have severe limitations on non-competes. The “experiments” in these states apparently prompted President Biden, in July of 2021, to issue his “Promoting Competition in the American Economy Order”, a broad Executive Order that purports to encourage innovation and competition in the American workplace. The Order asks the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Here is what the Executive Order looks like:
The FTC has sought public comments to the proposed rule. The comment period ends on March 6, 2023. Thereafter, the new law may take effect as soon as 180 days following the comment period. Instructions for sending comments are found in the Notice of Proposed Rulemaking.
One of the upsides of a non-compete is that it helps protect trade secrets and IP, but this can be achieved through a confidentiality or non-disclosure provision. It also keeps former employees from taking your business model and creating a competitive business, which may be difficult to achieve otherwise. However, do you really want to retain an employee who wants to leave simply because he signed an agreement that says he or she cannot compete with you?
The downside of non-competes is that, to some, they violate public policy by restricting the mobility of workers. They are also limited in scope, and expensive to enforce.
What does it mean to you? The general consensus is that the new law will be challenged in court. If it is not, and it becomes law, not only will you no longer be able to legally use non-competes with your employees, but you will have to rescind existing non-competes and inform your employees that the clauses are no longer in effect.
Stay tuned for updates.
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Ken Greene is an attorney and Editor of Leasing News. To contact Ken, email: firstname.lastname@example.org.