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Many states have grappled with the enforceability of non-compete agreements. Non-compete agreements are clauses in employment contracts that restrict an employee from working for competing businesses during employment or for a period of time after their current employment ends. Generally, to be enforceable, state courts require that restrictions imposed by non-competes, including the time frame, industry, and geographic scope of the agreement, be reasonable under the circumstances. However, this varies from state to state.
The truth is that many are raising the point that non-competes should not be allowed at all. In fact, the Federal Trade Commission (FTC) has recently proposed a new rule that would place a nationwide non-compete ban, which is now being subject to public comment.
Why the FTC Wants to Impose a Nationwide Ban on Non-Compete Clauses
The FTC is on a mission to put a nationwide ban on non-compete clauses. The agency asserts that such restrictions imposed on U.S. workers are exploitative and lead to wage suppression, are innovation hampering, and blocks entrepreneurs from starting new businesses. Furthermore, the FTC asserts that non-competes act as an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.
The Chair of the FTC has publicly stated that non-compete agreements threaten economic liberty and block the path to a “competitive, thriving economy” to which the freedom to change jobs is essential. It is also asserted that noncompete agreements prevent workers from freely switching jobs, which works to deprive them of both better working conditions and higher wages. The restrictions can also deprive businesses of tapping into a talent pool needed for growth and expansion. In fact, the FTC estimates that putting an end to non-competes could lead to an increase in wages by almost $300 billion per year and expand career opportunities for approximately 30 million Americans.
For a clearer idea of what the FTC is trying to do, let’s go into more detail about the proposed rule itself. The FTC sees non-competes as a roadblock to innovation and better opportunities for workers, and the proposed rule is supposed to address these problems. Specifically, the new rule proposed by the FTC would make it illegal for an employer to:
- Enter into or attempt to enter into a non-compete with a worker;
- Maintain a non-compete with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
Independent contractors and anyone who works for an employer, whether they are paid or not, would be included in the FTC’s proposed rule. Additionally, employers would have to rescind any existing non-competes as well as actively inform workers that the existing non-competes have been rescinded and, therefore, were no longer in effect. The rule would only apply to other types of employment restrictions if they were broad enough that they essentially functioned like a non-compete.
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