On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would prohibit employers from imposing non-competes on their workers. The FTC aims to improve the job market by expanding the liberty of employees to seek jobs in the same labor market or start their own businesses.
Some employers favor non-compete agreements because they reduce turnover and allow greater investment in training. But with this proposed new rule, the FTC suggests it could increase wages by up to $300 billion per year and broaden career opportunities for nearly 30 million Americans.
Summary
- The FTC has proposed a ban on non-compete agreements between employers and employees to increase job opportunities and put upward pressure on wages.
- The vast majority of states currently allow employer non-compete agreements under limited circumstances.
- If the FTC decides to move forward with the ban, it is likely to face legal challenges.
Contents
- What are non-compete agreements?
- In what states are non-competes currently legal?
- Why is the FTC proposing this ban?
- Is the ban likely to go into effect?
- Legal implications of banning non-compete agreements
- How to get out of a non-compete agreement
What are non-compete agreements?
A non-compete can come in two forms, either as a clause or provision in an employment contract or as a standalone agreement. In either case, non-competes prohibit an employee or contractor from competing against their current or former employer for a particular amount of time and geographical location.
Employers must have a legitimate reason why to impose a non-compete on an employee. Such reasons include preserving intellectual property, protecting trade secrets, reducing labor turnover, and much more.
Advocates of non-competes suggest that non-compete agreements strengthen the business by matching employees with employers that are seeking staffers for long-term positions, thus reducing employee turnover rates. With this long-term commitment, employers can adequately train their employees to perform at the highest level without the fear of an employee leaving with trade secrets and potentially competing against their former employer.
In what states are non-compete agreements currently legal?
Currently, only three states have entirely prohibited employer non-compete agreements:
- California
- North Dakota
- Oklahoma
The remaining states allow non-compete agreements only under specific criteria, such as if the employer can demonstrate a specific and legitimate business interest that the agreement would protect. States may also ban non-compete agreements for certain professions, or for low-wage and or hourly workers.
Why is the FTC proposing this ban?
The FTC suggests that employer non-compete agreements negatively affect the labor market by suppressing the career options of workers. Non-compete agreements have been scrutinized as potential anti-trust violations because they necessarily restrict free trade.
The FTC’s acting chairperson, Lina M. Khan, has frequently called non-compete agreements “exploitative.” Khan argues that workers have the right to switch jobs and look for higher wages, which she believes is the key to a balanced, healthy, competitive, and flourishing economy.
The proposed ban would not affect non-compete agreements that arise as part of the sale of a business or otherwise exist outside the context of employer-employee relationships. The rule would be both prospective, banning future employer non-compete agreements, and retroactive, nullifying those already in place.
Is the ban likely to go into effect?
The FTC voted 3-1 to publish the Notice Of Proposed Rulemaking announcing the proposed ban. Beginning January 5, 2023, the agency will accept public comments for a period of 60 days.
The FTC expects to receive hundreds, if not thousands, of public comments regarding this rule. Due to this massive influx and the potential legal implications of enacting the ban, a final ruling is not expected until 2024.
Legal implications of banning non-compete agreements
If the FTC does ban employer non-competes, it will likely face many legal challenges. FTC Commissioner Christine S. Wilson has said the agency’s authority to enact the suggested ruling would be brought into question as it makes its way through the courts, potentially ending with the United States Supreme court for a final ruling.
How to get out of a non-compete agreement
As workers await the FTC’s final rule, some may still be stuck under the thumb of an unfavorable non-compete from a former employer. Terminating a non-compete agreement is no easy task, but there are options for those seeking to withdraw.
Before taking action, the party seeking release should read the agreement carefully to confirm if the opportunity they want to pursue is indeed prohibited by the agreement. Many employer non-compete agreements are drafted narrowly and may not cover the situation at hand.
The first potential solution is to seek a non-compete release of liability. Current or former employees can request that their employer voluntarily release them from a binding non-compete agreement. In some cases, the employer may require compensation to release an employee from a non-compete.
If a release of liability is not on the table, the next step is to seek legal action. Non-compete agreements must be reasonably limited in length and geographic scope. If the party seeking to withdraw can prove that the agreement is unreasonable or that it presents undue hardship, they may have a strong case.