By Anita Byer, Setnor Byer Insurance & Risk
The Federal Trade Commission recently proposed a new rule that would ban the use of non-compete clauses in employment agreements. The FTC believes that the widespread use of non-compete clauses suppresses wages, hampers innovation and stifles entrepreneurship. According to FTC estimates, the proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for millions of Americans. It could also cause inconvenience, disruption and even financial harm to countless individuals and businesses nationwide. A watershed moment indeed, but for better or worse?
Under the proposed rule, the use of non-compete clauses would be considered an unfair method of competition. As such, it would be unlawful for an employer to:
- enter into or attempt to enter into a non-compete clause with a worker;
- maintain a non-compete clause with a worker; or
- represent to a worker, under certain circumstances, that the worker is subject to a non-compete clause.
The notable breadth of the proposed rule comes from its definitions. “Worker” is defined broadly to mean any natural person who works for an employer, whether paid or unpaid, including employees, independent contractors, interns and volunteers. A “non-compete clause” is any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment, or operating a business, after the conclusion of the worker’s employment with the employer. This already broad definition is made even broader by including de facto non-compete clauses.
A de facto non-compete clause is any contractual term that has the effect of prohibiting a worker from seeking or accepting employment or operating a business after the conclusion of the worker’s employment with the employer. A non-disclosure agreement, for example, could be considered a de facto non-compete clauses if it is written so broadly that it effectively precludes the worker from working elsewhere in the same field. If the proposed rule is adopted, this functional test to determine whether a contractual term should be interpreted as a prohibited non-compete clause seems to be fertile ground for litigation.
So, what happens to existing non-compete clauses under the proposed rule? If adopted as is, the rule would require employers to rescind existing non-compete clauses with workers and actively inform their employees that the contracts are no longer in effect. The rule, however, does have a limited sale-of-business exception that allows a person who owns at least 25 percent of a business entity to execute a non-compete clause as part of a sales transaction.
It’s important to note that this is not a final rule. If and when the FTC publishes a final rule, it may be substantially different than the proposed rule. However, since any such rule could have potentially significant implications, employers should be paying attention to the FTC and its desire to essentially prohibit the use of non-compete clauses. Those not comfortable taking the wait-and-see approach are free to participate in the rule-making process. The FTC is accepting public comments on the proposed rule through March 10, 2023. So, what do you think? Should non-compete clauses be banned?
If adopted, the proposed rule would supersede any inconsistent state statute, regulation, order or interpretation, altering the nature employer / employee relationships nationwide. Please contact us to discuss the value of having Employment Practices Liability insurance coverage in this rapidly changing regulatory environment.