In January, the Federal Trade Commission (“FTC”) proposed a new rule that would prohibit employers from entering into, attempting to enter into, or maintaining a non-compete clauses with their employees. The FTC has preliminarily found that non-compete clauses constitute unfair methods of competition under Section 5 of the Federal Trade Commission Act and approximates that 30 million employees are subject to non-compete clauses in the United States.
The proposed rule defines a non-compete clause as a contractual term between an employer and an employee, which generally prohibits the employee from working for a competing employer, or starting a competing business, within a specific geographic area for a set period after the employee’s employment ends. The proposed definition does not explicitly include other types of restrictive covenants, such as non-disclosure agreements, but such covenants may fall under the umbrella of non-compete agreements if found to be so broad in scope that they effectively serve as non-compete clauses.
The proposed rule has limited exceptions. For instance, non-compete agreements restricting an owner, member, or partner holding at least 25% ownership interest in a business entity would not be affected by the proposed rule. Also, State and local governmental entities may be protected from the proposed rule when engaging in activity protected by the state action doctrine.
California, North Dakota, and Oklahoma have already implemented laws that render non-compete clauses void. Eleven other states and the District of Columbia have enacted laws that render non-compete clauses invalid or unenforceable under certain circumstances, such as non-compete clauses for low-wage earners. The FTC is now proposing a categorical ban of all non-compete clauses nationwide.
The FTC urges that non-compete clauses block employees from freely changing jobs, depriving them of higher wages and better working conditions, and negatively affecting competition. Proponents of non-compete clauses argue, and the FTC admits, that non-compete clauses incentivize employers to invest in employee training. Proponents also argue employers may withhold information if non-compete clauses are invalidated, as they will fear their employees will take such information to competitors.
The FTC has welcomed the public to submit comments on the proposed rule through March 10, 2023. Thereafter, the FTC will push for a final rule, which would take effect 180 days after the final version is published in the Federal Register. The 180-day period is referred to as the compliance period, during which employers would have an opportunity to take active steps to rescind existing non-competes and inform their employees that such clauses are no longer in effect.
Employers that would like legal counsel to review their existing non-compete agreements or submit a public comment in response to the FTC’s proposed rule are welcomed to contact any member of the Labor & Employment group here at Brown & Connery, LLP via e-mail or call 856-854-8900. Also, please visit the Brown and Connery website at www.brownconnery.com to learn more about our legal services.
By: J.T. Triantos, Associate and José Jimenez, Law Clerk at Brown & Connery, LLP