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Is it True? Will Noncompete Agreements Soon Be a Thing of the Past?

Jan 30, 2023 | Written by: Noel A. Lesica, Esq. |

Just days after the champagne was gone and the noisemakers put away, the Federal Trade Commission (FTC) announced the proposal of a new rule that would prohibit employers from imposing noncompete clauses on workers.  Yes, you read that correctly.  The rule’s purpose is to ban all non-compete agreements. As is often the case, however, the devil is in the details and how this will eventually play out for NJ employers remains to be seen.

Motivation for the Proposal

What was the motivation behind the proposal? According to the Fact Sheet released by the FTC, non-compete agreements cause three categories of negative consequences, and their elimination in three states has seemingly yielded positive results.  The research on which these findings are based was first reported in a June 6, 2020 paper titled The Labor Market Effects of Legal Restrictions on Worker Mobility[1].  According to the reported research, as explained further below, noncompete provisions reduce employees’ wages, stifle new business opportunities, and can “hinder economic liberty.”  It is also believed that employers can protect their trade secrets in other ways that are less “harmful” to workers. 

  • Reduce wages. Noncompete provisions “significantly reduce workers’ wages” by imposing limits on an employee’s ability to move from job to job freely.  They also affect the wages of workers not subject to such provisions because less jobs open up in their industry.  Researchers also assert that prohibiting such agreements would reduce wage gaps based on gender and race by 3.6 to 9.1 percent.
  • Stifle new business. Noncompete clauses are believed to inhibit “would-be entrepreneurs” from starting new businesses, and to deter workers from bringing their innovative ideas to other companies.  In smaller markets, consumers may face increased prices as a result.
  • Hinder economic liberty. Employers generally have more bargaining power than the employees they subject to non-compete agreements, which “coerce workers into staying in jobs they would rather leave.”  At present, states throughout the nation have their own laws respecting how noncompete provisions are enforced, laws rooted in a concern that such agreements generally restrict an employee’s ability to work in their area of expertise.
  • Companies can protect trade secrets other ways. Industries in three states that presently ban noncompete agreements – California, North Dakota, and Oklahoma – have “flourished” despite these prohibitions, which “shows that employers have other ways of protecting these investments.”

Rule Declares Non-Compete Provisions an Unfair Method of Competition

If passed, noncompete clauses will be banned as “an unfair method of competition.”  As presently phrased, there are no carve-outs, exceptions, or “shades of grey.”  Employers moving forward would be prohibited from requiring their employees or independent contractors to sign noncompete agreements.  Not even existing agreements would escape the law’s reach.  The new rule would require employers to cancel any existing noncompete clauses and proactively advise their workers that such agreements are no longer in effect. 

Rule Also Bans Contract Terms that Have the “Effect” of Stopping a Worker from Finding Another Job

The definition of “non-compete clause” is equally broad.  The rule defines such a clause as “a contractual term between an employer and a worker 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” and provides a “functional test” for determining whether a clause is such a contract term.  If a clause has the “effect” of prohibiting a worker from starting another job, it may be considered a “de facto non-compete clause.”  Examples of such terms include a broadly worded non-disclosure agreement or a requirement that workers pay for their training costs if employment ends before a certain period. 

Proposal Still in Rule-Making Stage – Comments Sought on Whether Senior Executives Should Be Exempt

The proposal is in the rule-making stage and the FTC seeks public comment on various topics, including, most significantly, whether there should be a carve-out for senior executives, and whether there should be different treatment for “low- and high-wage workers.”  If the rule excludes high-level executives, the legal landscape in this area might not change that drastically after all.  Employees subject to non-competes typically reside in the higher echelons of an organization, and companies willing to retain legal counsel and file a lawsuit seeking temporary restraints and an injunction against a former employee in breach of a noncompete must be willing to pay the costly legal fees to be able to do so.  Finally, even if the rule passes, legal challenges will no doubt follow. 

Stay Tuned. . .

Given the potential impact to businesses across the nation, if you’re an employer seeking to protect your company’s trade secrets, this new rule is certainly one to watch. 

If you have questions about how to protect your company’s trade secrets, or any employment law issue, Gebhardt & Kiefer’s employment law attorneys are happy to help.

[1] Matthew S. Johnson of the Duke University – Sanford School of Public Policy, Kurt Levetti of Ohio State University, and Michael Lipsitz from the FTC Bureau of Economics authored the paper. 

Noel A. Lesica 

Noel A. Lesica, Esq. focuses her practice on labor and employment and general litigation.  She has experience in virtually all aspects of employment law, including investigating and addressing claims involving sexual and other forms of unlawful harassment and discrimination, retaliatory practices, wage and hour violations, pay equity violations, leave entitlements under federal, state and local law, and restrictive covenants.  Ms. Lesica has also advised clients on a wide range of compliance issues related to COVID-19. 

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Any statements made herein are solely for informational purposes only and should not be relied upon or construed as legal advice.