By K. Nichole Nesbitt
As the Federal Trade Commission (FTC) seeks to outlaw non-competition agreements in the employment context, employers are asking what might come of the agreements they currently have in place to preserve their talent and protect against poaching. This article explores the current status of the FTC’s efforts and what happens if the FTC has its way.
What are non-competition agreements?
Non-competition agreements are contractual provisions between an employer and its workers that restrict the worker from working for a competing business after leaving their current employer under various circumstances. Some are direct restrictions, providing that a worker is prohibited from accepting a job at or providing services to a business that competes with the employer (often for a designated period of time and/or within a certain geographic area). Some are more subtle, allowing a worker to go to work for competing businesses, but prohibiting the worker from using any of the knowledge or training the worker obtained while employed by the employer, significantly decreasing the value the worker can provide.
Other restrictive covenants that often accompany non-competition agreements include non-solicitation agreements (in which the worker agrees not to solicit the employer’s clients, customers, or other employees when the worker leaves) and confidentiality or non-disclosure agreements (in which the worker agrees not to take or use proprietary or confidential information from the employer when the worker leaves).
What is the FTC trying to do (and not trying to do)?
The FTC’s position is that non-competition agreements prevent workers from seeking better terms of employment in their industry, thereby not only reducing competition among businesses but lowering wages for all workers, even those who are not subject to such an agreement. The FTC also projects that these agreements prevent new businesses from forming and stifle innovation that would otherwise occur when workers are able to move freely throughout the industry.
Under the FTC’s proposed new rule, non-competition agreements would be banned altogether, not just going forward, but retroactively. The rule defines a non-competition clause as a term that “prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Importantly, the rule does not just ban non-competition agreements that carry the label but any contractual provision that has the same effect, including non-disclosure agreements or even provisions that require workers to pay back employer-provided education or training stipends if they are so onerous as to effectively preclude a worker from leaving.
The rule is not a wholesale ban against all restrictive covenants in an employment agreement, however. It does not, by its terms, seek to strike down non-solicitation agreements or typical confidentiality agreements so long as they do not make it impossible for workers to seek employment in their chosen field. Additionally, the FTC carved out an exception for businesses that are being sold. In such a case, an employer can still utilize non-competition agreements for individuals that hold at least a 25% ownership interest in the business. Anyone else’s non-competition agreement would terminate.
What kind of reception has the FTC’s proposal had in Congress from the business community?
Many industries have pushed back hard against the proposed ban during the public comment period, which ended on April 19, 2023. The insurance industry, in particular, expressed concern that the ban would strain independent agencies that use non-competition agreements to protect against theft of their business assets.
Objectors also pointed out that the ban will chill the sale of businesses, because “prospective buyers may be less willing to purchase a target entity where key personnel could essentially leave and open up a competing business the next day.”
The United States Chamber of Commerce pronounced the ban “blatantly unlawful” and lacking in statutory or constitutional authority. It also criticized the FTC for claiming that the ban would result in massive wage increases, stating that this claim is not based on sound data.
The consensus in the business community is that the proposed ban will not pass in its current extreme form but may result in some significant restriction on the use of non-competition agreements. ALM Benefits Pro predicts businesses may see “a more surgical approach that addresses hardships that noncompete clauses impose on lower-wage workers who many observers believe should not be bound by them in the first place.”
What should employers be doing now, while we await legislative action?
Given that the ban is retroactive, any business that regularly employs non-competition agreements should identify all agreements in place that may contain such a provision. This includes not just employment agreements with current employees, but also separation agreements with departed employees and even sign-on agreements with employees who were hired subject to a non-competition agreement with a previous employer. If a ban or significant restriction on these provisions is passed, knowing which contracts are affected will provide an important head start.
It also makes sense for employers to take stock of the language they use for employment agreements in general. Even under current laws, the language of some non-competition agreements renders them unenforceable. Consider whether the agreements are properly circumscribed in time, geography, and general scope. Consider whether the agreements are limited to workers whose competition can actually cause hardship to the business versus workers who do not pose such a risk. Consider whether a provision labeled as a “non-competition agreement” is really a non-solicitation or confidentiality provision instead, which would not be subject to any proposed ban. A re-write of stale employment agreements may be in order even if the FTC is unsuccessful.
Be aware that the FTC’s proposed rule would require businesses to notify all employees that their non-competition agreements are void. It is likely that any ban – even a partial one – will include some sort of notice provision. Businesses should consider how best to communicate with their work force on this issue to avoid confusion and prevent planting the idea of desertion.
Nichole Nesbitt is Managing Partner of the law firm of Goodell, DeVries, Leech & Dann in Baltimore, Maryland. She represents businesses affected by non-competition agreements on both sides: those who want them enforced against a departing worker and those who seek to hire workers with agreements they consider to be overly broad. She can be reached at 443-801-5412 or[email protected].
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