Agreements that prevent former employees from working for a competing business or operating their own competing business may soon be unlawful in the entire United States. At present, roughly one in five American workers are bound by a non-compete agreement, but on January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would declare non-compete agreements an unfair method of competition. The FTC posits that non-competes prevent employees from leaving jobs for better opportunities, suppress wages, and stifle new businesses, innovation, and entrepreneurship.
California, Colorado, Illinois, Maine, Maryland, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia and Washington have already banned, limited, or restricted noncompete agreements in one way or another, but this new rule would create a nationwide ban on non-compete agreements and require employers to rescind existing non-compete agreements by providing notice to current and former employees that their non-competes are no longer enforceable.
The rule specifically includes non-disclosure agreements written so broadly that they effectively preclude employees from working in the same field after their employment terminates, as well as terms that require employees to pay back training costs if their employment terminates within a specific time period. The ban raises significant concerns for employers about employee retention and the protection of confidential information and intellectual property. Although, the rule does not prevent the use of other protective tools such as non-disclosure, non-solicitation, and confidentiality agreements, so long as they are not written so overly broad as to become de facto non-competes.
The proposed rule must first proceed through the administrative rulemaking process before it is finalized as a federal regulation. The FTC invites the public to submit comments on the proposed rule through March 10th, which may lead to revisions or alternatives. BurnsBarton will continue to monitor its development is prepared to advise clients on how to protect their legitimate business interests should non-competes become largely restricted or banned.
