On Jan. 5, the Federal Trade Commission proposed a new rule prohibiting employers from imposing noncompetes on their workers. When I first shared the news on LinkedIn, someone commented, "Yeah, bold move FTC ..."
And I thought, "Bold move is wearing seersucker before Memorial Day. This is mind-blowingly huge!"
Indeed, more than 11,000 people so far have officially commented on the FTC's website on the proposed rule. The comment period closes March 20.
Unfortunately, I don't have a crystal ball, so I don't know what the final rule will say, let alone whether it will hold up to judicial scrutiny.
I will focus primarily on how the FTC's proposal could affect employers if it is implemented as drafted. I'll also highlight one alternative pending in Congress: the Workforce Mobility Act.
What is the FTC doing?
The FTC's proposed rule would generally prohibit employers
from using noncompete clauses. Specifically, it would make it
illegal for any employer - regardless of size - to enter into or
attempt to enter into a noncompete with a "worker."
Worker means a
"natural person" who works, whether paid or unpaid, for an employer. This includes employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors who provide a service to a client or customer.
A worker does not include a franchisee in a franchisee-franchisor relationship but does include a natural person who works for the franchisee or franchisor. Noncompete clauses between franchisors and franchisees would remain subject to federal antitrust law and other applicable laws.
But existing noncompetes are safe, right? Wrong!
An employer that entered into a noncompete clause with a worker before the compliance date must rescind it no later than 180 days after the final rule's publication, which will be the compliance date.
The FTC has prepared model language for employers to communicate the rescission to workers. An employer may also use different language, provided that the notice communicates to the worker that the noncompete clause is no longer in effect and may not be enforced against the worker.
By default, the proposed rule does not ban other types of employment restrictions, such as nonsolicitation and nondisclosure agreements. Still, those agreements could be subject to the rule if they are so broad in scope that they function as noncompetes.
The FTC provides these examples of potentially de facto noncompete clauses:
- A nondisclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker's employment with the employer.
- A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker's employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
Also, the proposed rule will not apply to a noncompete clause that is entered into by a person selling a business entity or otherwise disposing of all of their ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity's operating assets, when the person restricted by the noncompete clause is an owner, member, or partner holding at least a 25% ownership interest in the business entity.
A possible alternative in Congress
Last month, a bipartisan group of U.S. Senators reintroduced the Workforce Mobility Act to limit the use of noncompete agreements.
According to a statement by the group, the legislation would:
- Narrow the use of noncompete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business.
- Require employers to make their employees aware of the limitation on noncompetes. The bill further authorizes the Department of Labor to do the same.
- Require the FTC and the DOL to submit a report to Congress on any enforcement actions taken.
Unlike the FTC's proposed rule, the Workforce Mobility Act affords victims a private right of action in federal court to recover actual damages and any attorneys fees and costs incurred. No pre-dispute arbitration agreement or pre-dispute joint-action waiver would apply.
In contrast to the FTC's proposal, the Workforce Mobility Act would not affect existing noncompete agreements. They would remain intact, subject to state law governing their enforceability.
How should businesses prepare?
Neither the Workforce Mobility Act nor the FTC's proposed rule supersedes any state statute, regulation, order or interpretation that is at least as protective as the proposed rule.
California, North Dakota and Oklahoma already ban noncompetes.
Companies doing business elsewhere don't have to start tearing up existing noncompete agreements because the FTC proposal is still a "proposal" and not a final rule. Likewise, the Workforce Mobility Act has to overcome many hurdles before crossing President Biden's desk for signature.
But courts evaluating the enforcement of noncompete agreements generally expect them to serve legitimate business purposes. And, even then, most courts consider the breadth of the agreement both temporally and geographically.
For example, the odds are much better that a court will enforce a six-month noncompete, with a 25-mile radius, against a member of the C-suite than it will a worldwide, three-year noncompete against a person whose job is to clean the C-suite.
Companies should consider suitable alternatives such as nonsolicitation agreements, to protect goodwill with customers and current employees, and nondisclosure agreements to protect against misappropriation of trade secrets and confidential information, which still allow former employees the opportunity to earn a living in their chosen profession.
Originally published by Business Insurance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.