FTC proposes ban on Non-Compete Clauses

varsha sarkar

March 27, 2023

5:12 pm

A new rule that would prevent companies from requiring their employees to sign non-compete agreements has been suggested by the Federal Trade Commission (FTC).

A non-compete clause is an agreement between an employer and employee that forbids the latter from joining a rival company or opening a rival firm, often within a specific geographic area and for a particular amount of time after the employee’s employment expires.

But now, an employer would not be permitted to impose non-compete agreements on employees, according to a new rule proposed by the Federal Trade Commission (FTC). 

These provisions are typically included by companies in employment contracts, and employees aren’t even aware of them until they give their two weeks’ notice. The HR manager must then let staff know that they are prohibited from working for a rival company for a specified period of time (usually anywhere from six months to two years).

Inquiries and concerns regarding the proposal’s scope and potential impacts on their day-to-day operations were raised by numerous employers in reaction to the federal government’s proposal to abolish the majority of non-competition agreements. This rule would not only prohibit employers from entering into new non-compete agreements but also oblige them to void any existing ones because non-compete agreements are already a common business strategy for organisations of all sizes and sorts.

The good news is that we can assist. The leaders of our Employee Defection and Trade Secrets Practice Group have compiled a list of frequently asked questions concerning all facets of the plan in this insight, which will be updated as new information becomes available in the upcoming months.

The Federal Trade Commission suggests banning non-compete agreements between companies and employees and ordering them to revoke any such agreements that already exist. According to the Commission, the new rule would boost American employees’ annual incomes by $250 billion to $296 billion. The Commission is seeking feedback from the public on its proposal to rule that non-compete provisions are an unfair method of competition as well as on potential alternatives to this rule.

The proposed rule acknowledges that other common forms of restrictive covenants, such as non-disclosure agreements and client or customer non-solicitation clauses, can be broadly drafted to have the same effect as a non-compete clause and can effectively serve as de facto non-compete agreements even though it does not explicitly forbid them. As a result, the rule forbids the adoption of any agreement that prevents employees from looking for or accepting new employment. The law forbids, for instance, that companies can make workers pay back training expenses if they quit before a set amount of time if “the required payment is not fairly related to the costs the employer expended for educating the worker.”

Non-compete restrictions can occasionally be a hindrance. These agreements are designed to safeguard the financial commitments firms have made to their operations and personnel. Approximately 18% of U.S. employment, or more than 30 million workers, are thought to be subject to such a requirement.

The U.S. Federal Trade Commission recently proposed a new rule prohibiting the use of non-compete clauses in employee contracts because they allegedly depress salaries, stifle innovation, and restrict business owners from launching new ventures.

Ironically, despite the fact that the enforcement of those very laws is frequently criticised as being the functional equivalent of a non-compete agreement, the FTC cites employers’ use of trade secret laws, including the doctrine of inevitable disclosure, as acceptable alternatives to the enforcement of non-compete agreements. Employers who rely on non-compete agreements shouldn’t panic just yet. The majority of commentators concur that, if at all, the proposed rule will likely fail to be implemented in its current form. This FTC initiative should serve as a reminder to employers who have historically depended on non-compete agreements that their excessive usage has sparked political controversy and necessitated regulatory and statutory countermeasures.

Non-compete agreements are increasingly being restricted or even prohibited by states, and over the next few years, this trend will certainly continue.

varsha sarkar

March 27, 2023

5:12 pm

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