The Federal Trade Commission recently proposed a new rule prohibiting employers from imposing noncompetes on their workers. The FTC has stated that it believes that employers’ use of noncompetes is not only exploitative, but also suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. The proposed ban is causing concern among business owners, many of whom have woven non-compete clauses into a variety of contracts and agreements, including employment agreements, stock grants, bonus plans, and even independent contractor agreements.
Here’s what employers need to know and do now.
What Does the FTC Rule Propose?
The proposed rule would make it illegal for employers to impose noncompetes on employees. This includes potential hires as well as current employees. The FTC believes these types of agreements are unfair methods of competition and therefore violate Section 5 of the Federal Trade Commission Act.
Potential Impact on Employers
If this rule goes into effect, employers will no longer be able to rely on noncompete contracts to protect their confidential information or trade secrets and prevent former employees from working for competitors or starting competing businesses.
Specifically, the FTC’s new rule would make it illegal for an employer to:
- enter into or attempt to enter into a noncompete with a worker;
- maintain a noncompete with a worker; or
- represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.
The proposed rule does not apply to other employment restrictions, such as non-disclosure or confidentiality agreements. However, these types of employment restrictions must not be so broad in scope that they essentially function as noncompetes.
It is important to note that if the FTC’s rule goes into effect, existing noncompete contracts will remain valid until they expire, at which point they will no longer be enforceable. As such, business owners should begin taking the following steps now.
- If desired, submit comments on the proposed rule. The FTC will review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further analysis of this issue. The comment period is open through March 10, 2023.
- Determine if your company has trade secrets or confidential information that need to be protected via other legal avenues such as non-disclosure, confidentiality or trade secret agreements.
- Work with an employment attorney to make adjustments to existing contracts and agreements so that they are no broader than they truly need to be, and to preemptively comply with potential new rules while still protecting the company’s trade secrets and confidential information.
It remains to be seen whether or not the Federal Trade Commission’s proposed ban on noncompetes will go into effect and what the exact parameters will be—but it’s certainly something that employers of all sizes need to keep an eye on in the coming months. It is also worth noting that in many states, including Colorado, there are already serious restrictions on noncompetes, and all employers should be aware of those.
Fortis recommends that you reach out to an employment attorney now to begin reviewing the appropriate next steps for your company to ensure compliance with current and future regulations.