What the proposed FTC restrictions on non-compete clauses mean for businesses

The Federal Trade Commission (FTC) introduced a Notice of Proposed Rulemaking that seeks to outlaw non-compete clauses imposed on employees. This proposed rule would effectively act as an absolute ban for any contractual provisions and employment policies with similar consequences.

The FTC’s new rule would make it unlawful for employers to enter into, attempt to enter into, or maintain a noncompete agreement with any worker; as well as represent that the worker is subject under certain circumstances. This applies to both paid and unpaid employees along with independent contractors alike. Furthermore, existing agreements must be rescinded by the employer and all workers must be notified in writing of it no longer being valid.

The rule of non-compete clauses covers virtually every worker and company in the country, including independent contractors and unpaid workers. Even with so-called “exceptions,” they are not truly exceptions to the use of non-competes; instead, these serve as a confirmation that their usage is still acceptable when it comes to franchising or selling off businesses.

The Federal Trade Commission (FTC) estimates that banning non-compete agreements could boost American wages by an impressive $300 billion annually. Considering this, the FTC is currently taking legal action against three businesses (Prudential Security, O-I Glass, and Ardagh Group) they allege are misusing such clauses.  The order charges the companies of manipulating wages and creating a hostile environment that impedes new rivals from breaking into the market.

Chair Lina M. Khan emphasized the ability to change jobs is an intrinsic element of economic freedom and the key to a prosperous economy. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Employers should consider whether the definition of a “non-compete clause” encompasses other forms of restrictive covenants that employers may employ such as employee and customer non-solicitation agreements. Utilizing a functional test, it can be determined if an unspoken de facto non-compete exists when the agreement created hinders employees’ ability to seek or accept employment with another entity or operate their own business after leaving their current job.  It is possible that a non-solicitation clause, which prohibits the worker from “accepting” business from past customers, could be interpreted as an implicit form of a non-compete agreement. If the FTC takes a strict stance regarding these issues, they risk facing multiple legal battles. Advocates of such restrictions may argue that this position would go beyond the scope of their rulemaking authority since it could result in challenging all non-solicitation clauses (not just those related to non-competes) when employers attempt to include them in agreements with employees.

Further, employers currently use non-disclosure agreements to safeguard confidential information, and these actions may be subject to review under the new rule. If this measure passes into law, companies will need to navigate between following legal requirements and receiving complete protection for their private details.

The NPRM is inviting stakeholders to leave their feedback and suggest replacements for the proposed ban. This public comment period will conclude in 60 days from when the NPRM is officially published in the Federal Register before making it final. Companies are then given six months to terminate any current non-compete clauses.

As the status of the non-compete clause ban remains uncertain, it is essential that employers seek legal advice to evaluate their current policies and contracts which may be impacted by a finalized rule. Simultaneously, companies must create new protocols to defend confidential data as well as other legitimate business interests without relying on prohibited agreements. Proactivity will ensure businesses stay ahead of any potential changes in regulations or laws.

At Global Legal Law Firm, our legal team boasts a wealth of experience and expertise in business litigation, corporate transactions, and payment laws. Our clients look to us for our reliable outside general counsel services because they know that we possess an intricate understanding of the everyday challenges businesses encounter. We prioritize mitigating risk while maintaining compliance with the increasingly complicated web of regulations that all companies must abide by – all from a practical business standpoint.