What Employees Should Know about the FTC’s Proposed Ban on Non-Compete Agreements
An estimated 30 million U.S. employees today are bound by non-compete agreements that place limits on their freedom to pursue competitive wages and new job prospects.
These restrictive contracts — formerly applied only to workers with highly technical roles or proprietary knowledge — are widespread across the American labor force.
Employers exploit overly broad non-compete agreements, using them to put legal pressure on workers, dissuading them from changing jobs and taking their skills to competing businesses.
In January 2023, however, the Federal Trade Commission proposed a new rule that would be a significant win for the millions of workers trapped in these unfair contracts.
In this blog post, we’ll break down what non-compete agreements are, the details of the FTC’s proposed ban, and the impact that it would have on workers currently bound by non-competes.
If you have questions about non-compete agreements, please contact the experienced employment lawyers at Ottinger Employment Lawyers today.
What is a Non-Compete Agreement, According to U.S. Law?
A non-compete agreement is a legal contract aimed at preventing employees from working with companies that are competitors of their current employers.
The agreements, which are also referred to as non-compete clauses, are often found in employment contracts issued when a worker starts a job, but they can also be separate documents.
Companies use these agreements to keep workers from taking their skills and knowledge to competing businesses by putting restrictions on when, where, and for whom their employees can find a new job.
For example, an agreement might say that a TV anchor has to wait six months before taking a new position elsewhere in the industry — or that a consultant can’t work with competing firms within a 50-mile radius of their previous company’s main office.
Some non-compete clauses try to ban workers from working in entire industries. An online retailer, for example, might have its engineers sign a non-compete clause prohibiting them from working with any other online merchant.
These restrictions can have a significant negative impact on employees. Limiting when and where workers can seek employment can prevent them from pursuing their career goals or taking a position with better pay.
If an employee breaks their non-compete agreement to take a job, their former boss could sue, putting their new position at risk and threatening a costly and time-consuming legal battle.
Restrictions on worker mobility aren’t just bad news for individuals. They also contribute to broader detrimental economic trends: depressed wages, a lack of innovation among businesses, higher prices and less choice for consumers.
Because of this, a number of U.S. states have passed laws restricting or banning the enforcement of non-compete agreements between employers and workers.
New York, for example, has passed regulations in recent years dictating certain standards that non-compete agreements must meet to be valid to protect business interests and not place undue burdens on employees.
Meanwhile, in California, non-compete agreements are illegal entirely.
Why Does the FTC Want to Ban Non-Compete Agreements?
Part of the FTC’s job as a federal agency is to protect and promote healthy competition among businesses. This includes prohibiting “unfair or deceptive” commercial practices or “unfair methods of competition” that affect businesses.
Non-compete agreements between employers and workers, they argue, have become one of these unfair methods of competition.
Trying to use non-compete agreements to hoard skills and labor is an unfair business advantage — one that hurts workers by pressuring them to give up better pay or opportunities for the benefit of the company.
The FTC’s rule proposes a broad ban on non-compete agreements and/or any restrictive contract that has “the effect of prohibiting 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.”
The rule doesn’t explicitly apply to other common restrictive covenants that employers may also issue to their workers, like non-disclosure agreements or specific protections for intellectual property.
But the rule would allow for invalidating certain contracts that effectively limit job mobility like non-compete clauses.
For example, if an employer’s non-disclosure agreement is written so broadly that it would prevent a worker from getting another job in the same field or industry, then it could be thrown out by a judge.
The proposed rule would surpass all existing state laws regulating or allowing some form of enforceable non-compete agreement between employees and employers.
For example, in states like Illinois and Oregon, non-compete agreements are currently only illegal for employees who earn less than a specified dollar amount.
The FTC regulation would overrule all those state-by-state exceptions with the nationwide ban.
There is one instance where non-competes can arise in a professional context where the new rule wouldn’t apply. The rule doesn’t extend the ban to situations where non-compete agreements are involved in the sale of a business.
If the founder of a restaurant decides to sell her stake in the business and pursue other ventures, she could legally enter into a non-compete agreement with the buyer.
What Does the FTC’s Proposed Rule Mean for Workers?
The proposed rule would make it illegal for companies to restrict any and all workers — paid or unpaid — with non-compete agreements as conditions for employment.
In addition to preventing companies from issuing these contracts to workers in the future, the new rule would also void all existing non-compete agreements between employees and employers.
This means that if the rule is approved, companies are required to notify their current and former workers that they’re no longer bound by the terms of the agreement they’d signed — and to do so within 180 days of the rule’s adoption.
The FTC proposed the rule on January 5, 2023, but it doesn’t operate as law yet. First, it’s subject to a 60-day public comment period, after which the terms of the rule could be revised.
The final version of the rule will depend on the practical and legal objections to the existing rule that arise during the public comments period.
Although it’s possible that the rule could be finalized by the end of the year, it’s likely that some legal challenges will come up and complicate the process.
Nonetheless, the FTC’s proposed rule is a significant move that could have a notable impact on workers’ lives if it’s approved. In the meantime, workers who are bound by non-compete agreements can still take action to get out from under their employer’s unfair restrictions.
Know the law in your state: Are non-compete agreements enforceable? Are there standards that employers or these agreements need to meet for them to be valid restrictions?
In some states, like New York, it’s illegal for companies to present hourly wage workers with non-compete agreements. California law prohibits employers from enforcing them altogether.
Understand the scope of the agreement and your job: Does your work involve highly proprietary information, like in research and development? Do you deal with protected intellectual property or trade secrets?
If not, your company may not be able to argue in court that they have a legitimate business reason for restricting your future job prospects.
Get in Contact with an Experienced Employment Lawyer Today
Seek support from an expert: Many companies coerce their workers into staying in their jobs with non-compete agreements that are technically unenforceable, knowing that employees often don’t fight back due to fear of legal repercussions.
But even in states where non-compete agreements are legally enforceable, many of them can still be rendered invalid by a judge if they’re too broad and place an undue burden on you as an employee.
Consulting with an employment attorney can be a crucial asset for employees who are trying to free themselves from a non-compete agreement.
An experienced attorney will be familiar with the specific laws and regulations in your state. They can help you understand the details of the agreement you’ve signed, advise you about your options, and be your advocate if you decide to go to court.
If you work in New York or California and are facing a non-compete agreement, contact the team at Ottinger Employment Lawyers to talk to an attorney about the details of your case.