A new rule proposed by the Federal Trade Commission (FTC) would ban employers in the United States from forcing non-competes on their employees or independent contractors. If the rule is implemented by the FTC, then non-competes would be illegal at the federal level and would affect employers and their workers across the country.
What is a Non-Compete?
A non-compete is when an employee agrees not to work for a competitor or start a competing business in the same field or industry within a certain time period. Non-competes could also require employees to not compete within a specific geographic area after their employment ceases. Employers use non-competes to ensure that employees do not use information obtained during their employment in a way that harms the employer.
Non-competes were first used in employment agreements with senior executives, who generally have more bargaining power than the everyday employee. However, as employers look to protect their confidential information, relationships, goodwill and investment into the training of an employee, non-competes have trickled down to nearly every employee or independent contractor.
Currently, only California, North Dakota, Oklahoma and Washington, D.C., have prohibited non-competes from being enforced. Otherwise, most states allow a non-compete to be enforced. However, some states may have caveats as to whether a non-compete is enforceable. For example, New York will only allow non-competes if the non-compete (1) is necessary to protect an employer's legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public and (4) is reasonable in its time period and geographic area.
The FTC's Proposed Rule
The new rule by the FTC would ban non-competes at the federal level. The FTC has proposed this new rule in an effort to prevent unfair methods of competition. According to the FTC, non-competes allow employers to exploit their bargaining power and can hinder innovation or prevent new businesses from starting. The new rule would prohibit an employer from:
- entering into or attempting to enter into a non-compete with an employee or independent contractor;
- maintaining a non-compete with an employee or independent contractor; or
- representing to employees or independent contractors that they are subject to a non-compete.
Under the new rule, employers would also have to rescind existing non-competes and inform workers that the non-competes are no longer valid. The rule would not apply to other areas of employment restriction, such as non-disclosure agreements (NDAs), unless these restrictions were so broad that they acted as non-competes.
The FTC's Exception for the Sale of a Business
Like most rules, the FTC has carved out an exception to its proposed non-compete rule. Non-competes would be allowed and enforceable when someone is selling their ownership interest in a business or is selling all or substantially all of the business's operating assets when the person is a substantial owner of the business. This allows the buyer of the business to be protected from the seller using his or her knowledge to immediately create a competing business entity.
How will the FTC Rule Affect Employers and Employees?
The FTC's new rule will affect both employers and employees alike. The ban on non-competes will allow employees to earn higher wages or salaries. Employees will also now have the freedom to terminate their employment and find new employment in the same field or industry. Similarly, employers would be able to hire the talent they feel would be the best fit and they no longer have to be concerned with a worker's non-compete from a previous employer.
On the other hand, employers who wish to protect confidential information will have to do so through other restriction methods, such as NDAs. Employers could also see an influx in competition as employees who are not hindered by a non-compete now have the option to leave and start their own competing business.
Non-competes can be a complex area of employment law. Should the FTC ban non-competes at a federal level, employers, employees and independent contractors will all be impacted. Consulting an experienced attorney will ensure that your rights are protected and that the implementation of the FTC's new rule is seamless.
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