- The ruling is in a 60-day public comment period. The U.S. Federal Trade Commission must accept public comments before ruling. It's already receiving a lot of pushback from businesses claiming noncompetes serve a purpose, the current wording needs to be more specific and the FTC might be overstepping its boundaries.
- The FTC claims that banning noncompetes will benefit employees. According to the FTC, employees will have more career opportunities without noncompetes and increase wages by close to $300 billion.
- The ruling will apply to all employees. Full and part-time employees, independent contractors, and interns will benefit from this ruling if it passes as proposed.
The U.S. Federal Trade Commission (FTC) has proposed a ruling banning employers from adding noncompetes to their employment contracts. Noncompetes forbid employees from accepting jobs with rival companies or starting competing businesses for a period after leaving their position.
The noncompete ban applies to all workers, including independent contractors and interns. As a federal rule, it would supersede state laws which currently have the power to determine how noncompetes work within state lines.
If approved, the ruling will make it illegal for an employer to:
- enter into or attempt to enter into a noncompete with a worker;
- maintain a noncompete with a worker; or
- represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
While noncompetes are commonplace throughout all industries, the FTC claims it's exploitative and wants to end the practice. It believes doing so will expand career opportunities and increase wages by almost $300 billion. The FTC also estimates that 1 in 5 employees are under a noncompete at work — that's approximately 30 million people.
President Joe Biden is a proponent of banning noncompetes and called for the FTC to take action in his July 2021 executive order. Within the order, the White House directed the federal government to prioritize competition policy and enforcement within companies. It specifically asked for the FTC to rule on noncompete clauses.
“These agreements block millions of retail workers, construction workers, and other working folks from taking a better job, getting better pay and benefits, in the same field,” Biden stated after the ruling was released.
On the other hand, employers claim they serve a valid purpose, and having one in place can safeguard intellectual property and confidential data.
The four-person commission voted 3-1 last month to issue the proposal, which is currently going through 60 days of public comment.
“The FTC's proposed rule is already receiving significant pushback from the business community and may be modified before promulgated after the comment period,” said James Witz, an attorney specializing in non-competition and trade secret disputes at Littler Mendelson P.C.
Another argument against the ruling is that it'll overturn state laws that currently have authority on noncompetes.
“Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,” Sean Heather, U.S. Chamber senior vice president for International Regulatory Affairs and Antitrust, said in a statement.
Currently, there are three states with laws banning noncompetes — California, North Dakota and Oklahoma. Others have state laws restricting the use.
“Employers in those states have found creative solutions to protect their businesses, which should serve as a roadmap,” said Chris Nickels, partner at Quarles & Brady LLP.
“Some creative solutions businesses can turn to include incorporating confidentiality agreements to protect their information and preventing the transfer of confidential information off company devices and networks.
How will the proposed ruling pan out? Only time will tell. Until then, Witz recommends that employers “make sure their existing noncompetes, customer non-solicits and confidentiality provisions are as enforceable as possible under existing law.”
Nickels noted that even if the new rule doesn’t pass, it might still behoove employees to negotiate revisions in their existing employment contract, such as agreeing to a nonsoliciation instead of a noncompete.
If it does pass, Nickels said employees will be motivated to ensure their employer is complying.
“If this rule becomes final, the only enforcement is likely the FTC itself,” he said. “There’s no final right to action, and [employees] will need to complain to the FTC, who would then take action.”
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