You may have heard about the Federal Trade Commission’s (FTC) upcoming ban on non-compete agreements just after the beginning of the year.
The new FTC rule makes it illegal for business owners to:
Enter into or try to enter into an agreement of non-competition with a worker.
Maintain a non-compete with an employee; or
under certain circumstances, represent to an employee that they are subject to a non-compete.
The rule also requires business owners to rescind existing non-compete agreements and inform employees that these agreements are no long valid. The FTC already has a model of how to inform workers about the cancellation.
The federal rule will also replace any existing state laws that permit non-compete agreements. However, non-competes can still be used if a business is sold. If you live in a state which currently allows non-compete agreements, then this federal rule, once it is enacted, will override that state law.
It doesn’t necessarily mean that if you already have a noncompete agreement in place as of January 5, you can now compete. The government is currently taking comments until March 10, 2023 on the proposed rule. Once the final rule is published and implemented 180 days later it will be expected that it will invalidate most non-compete agreements in the United States.
This is a major announcement, but it won’t change anything until this rule becomes law.
Non-competition Agreements are used by businesses to prevent employees from launching a competing business or joining a competitor within a specified period after the end of the employment arrangement.
Noncompete agreements can also be used in buy/sell contracts following the sale of an enterprise to prevent the seller from opening up a competing business that could potentially devalue the firm itself.
The logic behind non-compete agreement is that the business owner spends time and money on developing proprietary business processes, methods, and procedures for how to operate and market their products and services, train their employees, maintain their client, vendor, and lead lists. They want to be legally able to restrict workers from using this information to harm their business.
In the same way, when negotiating the sale of a company, the buyer wants to be assured that the seller will cooperate and assist in the transition of the business from him to the buyer, and won’t compete with the seller for a certain period, as this could reduce the value of the actual business. As stated above, this prospective FTC rule would not apply to noncompetes that are used during the purchase/sale process of a company.
Each State has its own laws on restrictive covenants, including non-competes. The federal government has largely deferred to the states in enforcing restrictive covenants via statutes and court systems. However, through the FTC’s press release it seems the FTC is trying to “reinvigorate”, and remind people about Section 5 of FTC Act that bans unfair methods of competition.
Non-competes are restrictive from the worker’s perspective. They limit their ability to work freely at any job, and use the skills and knowledge they have acquired in a specific industry. These restrictions can also lead to long periods of unemployment or workers being paid less at their next job, as well as expensive lawsuits. It is important to note that, while not receiving much attention, workers are often at a disadvantage financially when they try to challenge the validity of the non-compete agreement or the misuse of the non-compete. Ex-employees are often forced to submit by companies who regularly spend more than they do in court.
There are also situations where non-compete agreements do not make any sense. Where a worker had no access to proprietary information or trade secrets, or in situations where restrictions prevent patients and customers from choosing where to purchase goods or services.
In the article “Physician non-Compete agreements: A necessary protection or an unnecessary restriction and impairment on patient care” (South Florida Hospital News April 1, 2022), I have personally commented on this distinction.
It is my belief that any restrictions between business owners and their workers should never get in the way of a customer/patient/consumer’s decision on whom they would like to work with or buy products or services from.
In its opening press release, the FTC acknowledged the concerns of workers when it stated that non-competition agreements are “a widespread and often exploitative practice which suppresses wages and hampers innovation and prevents entrepreneurs from starting new business.”
The FTC concluded its press release by stating, “The Federal Trade Commission promotes competition and protects and educates consumers.”
This rule would certainly benefit the government, as more employees and more wages equals more contributions to FICA. What people should know is that, once the final rule has been published, businesses will have 180 days to comply. The 180-day period will begin after the deadline for comments, which is March 10, 2023. This rule could come into effect at the end of 2023, or even early 2024.
I also expect legal challenges against the FTC to enforce a national rule. (This is similar to what we saw with the OSHA mandated COVID-19 vaccination).
Business owners are advised to stay informed about the possible enactment and implementation of this final rule. They should also be in constant contact with their labor and employment law counsel and be ready to modify their agreements or send appropriate notifications to former employees.
Business owners need to consider other ways of protecting their proprietary information. A business owner can also decide to eliminate non-competes today, even if the government doesn’t mandate it. Some people think that fewer restrictions on workers will lead to better retention.
Workers are advised to review their agreements to determine if they have any non-compete clauses. They should also consult with a lawyer and/or keep track of the date this law takes effect to notify their employer or current employer if it is required to cancel their non-compete.
It is clear that 2023 has a promising start when it comes to workplace law. I anticipate this will be the beginning of many more changes to come. Stay tuned.
Adam Kemper is the managing attorney of The Workplace Law Firm. Adam can be reached at [email protected]
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