FTC Bans Employee Non-Compete Agreements

Workers” by quinn.anya is licensed under CC BY-SA 2.0.

FTC will ban

Employee noncompete terms

For most workers, soon

The Federal Trade Commission (FTC) has voted to approve a proposed rule that would ban employers from using non-compete agreements with nearly all employees.

The FTC estimated that one in five US workers is bound by a noncompete clause.

The proposed rule change was open for public comment in early 2023 and more than 26,000 comments were received.

Some business interests opposed the rule change. The US Chamber of Commerce wrote the FTC in April, 2023 saying:

such a proposal fails to recognize that non-compete agreements can serve vital procompetitive business and individual interests—such as protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements.

Unless challenged successfully in the courts, the new rule will take effect 120 days after publication in the Federal Register (scheduled for May 7) – i.e., September 4.

According to a Fact Sheet issued by the FTC, the following are the key terms of the new rule:

  • New noncompetes will be banned for all workers after the effective date.

  • For existing noncompetes, the rules will be different for senior executives rather than other workers.

  • For senior executives, existing noncompetes can remain in force after the effective date.

  • For all workers not considered senior executives, noncompetes will be unenforceable after the effective date.

  • A senior executive is defined as a person earning more than $151,164 annually who is in a “policy-making position.” Fewer than 1% of employees are believed to be in this category.

According to the FTC,

The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives.

The rule bans noncompetes by providing that they’re an unfair method of competition and therefore a violation of 15 U.S. Code § 45.

As the New York Times reported in an in-depth 2017 article,

The growth of noncompete agreements is part of a broad shift in which companies assert ownership over work experience as well as work. …

According to the Times, employment lawyers say the use of employment noncompetes has exploded and that noncompete and trade-secret lawsuits roughly tripled from 2000 to 2017.

The FTC estimate that banning noncompetes will result in:

  • Reduced health care costs for physician services (since many doctors are subject to noncompetes)

  • A 2.7% increase in new business formation, with 8,500 additional new businesses created per year

  • An annual increase of 11-19% in new patents

  • An increase of $524 per year in the average worker’s earnings

Assume the new FTC rule goes into force, employers will need to revise their standard employment agreements that start after the rule’s effective date to remove noncompete language.

However, employers can still use other legal tools to protect their businesses.

For example, a confidentiality clause in an employment agreement, or a stand-alone non-disclosure agreement (NDA), can state that customer lists and customer information (such as buying history) can be protected as an employer’s confidential information.

Most states also allow employers to include non-solicitation clauses in employment agreements.

A non-solicit prohibits an employee from soliciting a company’s clients, customers, or employees after that employee has left the company.

The definition of “solicitation” varies from state-to-state, and what constitutes solicitation is fact-based.

For example, calling a former employer’s clients and asking them to switch their business to a new employer would widely be considered “solicitation.” A LinkedIn status update merely informing the public about an employee’s new job would likely not be considered “solicitation.” However, a LinkedIn post that actively solicited business for an employee’s new employer was held to violate a non-solicit clause in a 2017 Minnesota case.