By: Cristina N. Hyde, JD
Last Thursday, the Federal Trade Commission proposed a Non-Compete Clause Rule (the “proposed rule”) that would broadly ban the use of noncompete clauses in employment agreements. The typical noncompete agreement prevents individuals from working for a competing employer, or starting a competing business, after their employment ends. They also often include time and geographic scope limitations. The FTC believes this to be exploitative of the average worker and harmful to American innovation.
In a January 5, 2023 press release, the FTC declared that noncompete agreements not only harm competition by preventing workers from pursuing better opportunities but also by preventing employers from hiring the best available talent. Applicable to companies across industries and spanning all income levels, the FTC believes the proposed rule will expand career opportunities for millions of Americans and increase wages by nearly $300 billion per year. The FTC has also asserted that banning noncompete clauses nationwide will markedly close racial and gender wage gaps.
Grounded in Section 5 of the Federal Trade Commission Act which empowers the FTC to prevent businesses from using unfair methods of competition, the proposed rule would:
- Ban employers from entering noncompete clauses with their workers, including independent contractors.
- Require employers to rescind existing noncompete agreements with workers.
- Require employers to actively inform their employees that their noncompete contracts are no longer in effect.
Further, while the proposed rule would not generally apply to other types of employment restrictions such as non-disclosure agreements, these contractual terms could be implicated if the language is so overly broad as to have the same effect as a noncompete clause.
Although the proposed rule is still in its legislative infancy, employers should be aware that its implementation is a possibility and that, as a federal law, it would supersede state law. You can read more about New Jersey’s position on noncompete clauses and recent proposed legislation regarding restrictive covenants, here.
Campanella Law Office will be monitoring the Non-Compete Clause Rule closely as it progresses. Meanwhile, if you would like assistance reviewing and narrowly tailoring the restrictive language contained in your employment agreements, contact us.