The End of Noncompetition Agreements?
The Federal Trade Commission Issues Proposed Rule Banning Such Agreements
Ah – the noncompetition agreement. Something employers want for their investment in certain employees and something that is not as easy to write as it sounds. Lawyers often worry whether such agreements will pass muster in court, reviewing statutes and recent case law to determine whether the length and geographic scope of an agreement are reasonable and thus, enforceable. That era of wondering may be coming to an end.
The Federal Trade Commission (FTC) issued a new proposed rule banning the use of noncompetition agreements by employers and that rescinds all current non-compete agreements. According to the FTC, one in five workers, or 30 million people, have entered into noncompete agreements, which the FTC categorizes as an “exploitive practice that suppresses wages, hampers innovation, and blocks entrepreneurs from the starting new businesses.”
FTC Chair Lina M. Kahn stated in proposing the new rule that noncompetition agreements “depriv[e] businesses of a talent pool that they need to expand.” Businesses likely disagree as they are having a hard time keeping or hiring employees in this current economic climate. Forget about expanding, what about just staying afloat. And despite the FTC’s guess that 30 million people are stuck in a job due to a noncompete agreement, it is safe to say that some of the most affected businesses in this economy, i.e., service industries, are not the businesses that would be hiring an individual subject to a noncompetition agreement.
So what does the proposed rule specifically ban? After a 210-page explanation of the proposed rule, the FTC defines “non-compete clause” and what will be banned:
(1) Non-compete clause means a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.
(2) Functional test for whether a contractual term is a non-compete clause. The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. For example, the following types of contractual terms, among others, may be de facto non-compete clauses:
i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
Of course, this is just proposed, and if adopted, will likely lead to multiple lawsuits contesting the validity of this rule and whether it runs afoul of the FTC’s jurisdiction.
In the meantime, we can be sure Chambers of Commerce throughout the United States will be commenting on the proposed rule. If you wish to comment, visit https://www.regulations.gov and include “Non-Compete Clause Rulemaking, Matter No. P201200.”