The Federal Trade Commission announced a proposal to end companies’ practice of requiring non-compete clauses as part of their employment contracts. An estimated 30 million workers (18% of the workforce) currently are bound by non-competes. This would be a major adjustment for many companies.
The proposed rule regarding non-compete clauses would make entering into or attempting to enter into a non-compete clause with an employee an unfair method of competition which violates Section 5 of the FTC Act. The proposal defines a non-compete clause broadly as a contract 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.
Existing non-compete agreements would be impacted as well as new ones. The proposal would require employers to rescind any non-compete clause within 180 days after the FTC publishes the rule as final. This requirement would apply to both current and former workers. Non-competes entered into in connection with mergers and acquisitions, and franchisor-franchisee relationships would not be affected by this rule.
Critics of the clauses claim that banning them fosters competition, encourages better compensation (an estimated $300 billion boost a year rise in pay would come), narrows wage gaps with minorities, and promotes better working conditions.
We note that the rule as proposed does not create a right of individual employees to enforce it. Only the FTC would be able to enforce the non-compete ban as it is currently proposed.
The FTC expects to get many comments on the proposal, both for and against. Some scholars believe this rule would exceed the FTC’s rulemaking authority and it would certainly be challenged in court.
Is it a case of overreach?
The U.S. Chamber of Commerce, representing about 3 million businesses, announced that it would fight the FTC in court over the proposed changes. It claims that the FTC has overstepped its boundaries and is prepared to take them to court, calling the proposed change “blatantly unlawful.”
What should you do?
In short, for now it is business as usual. The FTC’s proposed rule is not law, so there is no need to make any changes to your ordinary business practices so long as they are compliant with current laws. If a final rule is ever implemented, it may be significantly changed from the proposal that was published earlier this month. There are lengthy notice and comment period requirements that apply before the rule can become law, and legal challenges are expected if the FTC moves forward.
Companies with questions about this and other legal issues can consult with an attorney who handles business law disputes and agreements.