Recently, the Federal Trade Commission (FTC) extended the public comment period for the proposed rule to ban employers from imposing non-compete agreements on employees. According to the FTC, such clauses constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. The FTC will now accept comments on the proposed rule until April 19. The original deadline for public comments would have been March 20. While the FTC continues to gather public opinion on its proposed non-compete agreements ban, at least one federal court ruled in favor of the employer in a non-compete agreement lawsuit. Last year, a district court awarded an employer $7.5 million in an unfair competition case.
What are Non-Compete Agreements?
Non-compete agreements are terms within an employment contract that prevent an employee from working for a competing employer or starting a competing business within a specific geographic area and period of time after a worker’s employment ends. As such, agreements limit competition by design. Therefore, the FTC regularly scrutinizes these types of clauses under federal antitrust laws. State and local jurisdictions also regularly review such clauses, particularly when they concern unequal bargaining power between employers and workers.
Proposed Rule to Ban Non-Compete Agreements
According to the FTC, non-compete agreements hinder innovation and competition by preventing potential entrepreneurs from entering the market or sharing new ideas with other companies. Subsequently, this could harm consumers by forcing prices to increase. The FTC’s reasoning and subsequent proposed rulemaking were based on a preliminary finding that non-compete agreements constitute a violation of Section 5 of the Federal Trade Commission Act. The FTC’s proposed rule to ban non-compete agreements would prohibit employers from imposing such restrictive clauses against employees. The proposed rule would make it illegal for an employer to:
- enter into or attempt to enter into a non-compete agreement with a worker;
- maintain and enforce a non-compete;
- convey in any way that a worker is subject to such a clause.
In addition, the proposed rule would apply to independent contractors as well as non-exempt employees. Finally, employers would need to inform workers that any non-compete agreements would no longer be in effect. By FTC estimates, stopping the practice could increase wages by $300 billion a year and provide greater career opportunities for 30 million Americans. Note that the proposed rule would generally not apply to nondisclosure agreements unless they were broad enough to function as non-competes.
The FTC directs interested parties to use Regulations.gov’s comment portal for the Non-Compete Clause Rule (NPRM) when submitting comments. The public has until April 19th, 2023, to submit comments on the proposed rule. If the FTC’s rule is finalized, employers will need to review and revise their hiring contracts and employee handbooks to reflect the change, in addition to including other critical employment laws necessary in an employee handbook.