JANE HARPER | The HR Digest | MARCH 13, 2023
The Federal Trade Commission (FTC) has proposed a new rule that would ban non-compete agreements in almost all employment contracts in the United States. This move aims to promote greater competition, innovation, and healthy competition by allowing employees to change jobs freely, without being restricted by non-compete clauses. The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, and would require employers to rescind existing non-competes and actively notify employees that they are no longer in effect. However, the impact of the ban is far-reaching, and the proposed rule is subject to a 60-day public comment period, during which changes may be made. This article answers all your questions about the proposed rule and its potential implications for employers and employees alike.
As an employee job hopping is the easiest and fastest way to get ahead in your career but sometimes non-compete agreements stand in your way. Non-compete agreements help companies protect their investments in their employees, which is why more than 30 million workforces or nearly 18% of the U.S. workforce are required to sign one before accepting a job.
On Jan. 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban non-compete clauses in nearly all employment contracts and invited public comment on the proposal.
So, when the US government proposed the rule to ban non-compete agreements many employers lined up with questions and concerns about the same and how this would impact their business in day-to-day life. This rule not only restricts companies from entering new non-compete agreements but also requires them to revoke the previous ones.
WHAT ARE NON-COMPETE AGREEMENTS?
Non-compete agreements are contracts signed by employers that prevent employees from working for “competitor” companies during or after their current employment. These contracts typically restrict workers through “Time, Industry, and Geography.”
- Time restrictions prevent workers to work for a competitor for a definite period of time after leaving the job.
- Industry restrictions prevent workers to work for a particular type of industry and sometimes even restrict workers to start their own competitor companies.
- Geography restrictions may restrict workers from accepting jobs in entire regions of the United States.
WHY DO WE NEED TO BAN NON-COMPETE AGREEMENTS?
Non-compete agreements were originally made to protect business trade secrets and other confidential information, which now is used by a lot of companies in low-wage industries to block workers from changing jobs and it effectively limits workers’ economic growth opportunities.
WHY DID FTC BAN NON-COMPETE AGREEMENTS?
In July 2021, President Biden issued Executive order titled “Promoting Competition in American Economy” which directed FTC to exercise its rulemaking authority under the Federal Trade Commission Act to cut down the unfair use of non-compete clauses or any other clauses that are unfairly using users mobility.
More than a year later, FTC moved forward with the President’s request.
Lina M. Khan, FTC chair said “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” Non-compete block workers from freely switching jobs, depriving them of higher wages and better working conditions and by ending this practice FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.
WHAT WOULD THE PROPOSED RULE DO?
The proposed rule, according to the FTC, would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also forbid employers from using non-compete clauses in general and make it illegal for employers to:
- Enter or attempt to enter into a non-compete agreement with a worker.
- Maintain a non-compete agreement or represent to a worker that they are subject to a non-compete agreement under certain conditions.
Employers would also be required to rescind existing non-competes and actively notify employees that they are no longer in effect, according to the proposed rule.
WHAT ARE THE COMPLICATIONS FACED IF VIOLATED THE PROPOSED RULE?
When the FTC believes its rules have been violated, it has the authority to file a complaint. If a respondent contests the charges, the complaint is heard in a trial-style proceeding before an administrative law judge (ALJ). Following the conclusion of the proceeding, the ALJ issues an “initial decision” containing findings of fact and conclusions of law, as well as a recommendation for a “cease and desist” order or dismissal of the complaint. The FTC and the respondent may both file an appeal with the full Commission. Following the Commission’s final decision, the matter may be appealed in court.
While, the Impact of the ban is far-reaching, for now, it’s a proposal, not the final rule. Companies should take advantage of FTC’s 60-day public comment period, following which FTC may make some changes to the proposed rule.
