On January 5, 2023, the Federal Trade Commission issued the following proposed rule banning non-compete agreements:
It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
The proposed rule has a 60-day comment period. Consistent with previous communications we have filed with the FTC, the Association will file comments stressing the responsible use of non-compete agreements, particularly at executive levels, while noting the impact the broad proposed rule would have on companies’ talent and compensation strategies.
The proposed rule would require significant changes to current practices by many, if not most, large companies. Here are five important considerations for CHROs and their teams to keep in mind as this issue progresses.
1. The Federal Trade Commission’s broad ban on non-compete agreements contains no exceptions for senior executives and other highly sensitive employees.
Notably, the ban applies to all employees (and independent contractors), with no exceptions for senior executives or those with access to sensitive, proprietary information. In the preamble to the proposed rule, the FTC cited a study stating roughly one out of five of all employees are covered by non-compete agreements. The strong push for a new federal ban has been fueled by recent reports regarding low-level hourly employees being restricted by such agreements. Yet, large companies more commonly limit such agreements to those, such as senior executives, who have information that could be damaging to the company in the hands of its competitors.
2. Even under most state laws, enforcing non-disclosure agreements against former employees is challenging, but the FTC would impose even more restrictions on their use.
Proponents of a ban on non-compete agreements argue that employers can protect themselves against anti-competitive actions by former employees by requiring them to sign a non-disclosure or “trade secrets” agreement. Under these, a former employee is contractually prohibited from providing any competitive information from the former company to the new one.
Yet, such agreements can be extremely difficult to enforce, with violations difficult to prove since a company would not typically have access to conversations and other actions taken by the former employee in their new company.
Meanwhile, the proposed rule would raise a new hurdle to the use of such agreements by prohibiting what it deems “de facto” non-compete agreements such as NDAs written so broadly that it “effectively precludes the worker from working in the same field.” In many cases, such agreements are in fact written broadly to meet the legal definition of an enforceable trade secrets agreement.
3. The proposed rules would preempt state laws that allow the use of non-compete agreements.
The proposed rule would only permit a state law that provides protection to workers that “is greater than the protection” provided under the proposed rule. Until now, restrictions and regulations governing the use of non-compete agreements have existed exclusively at the state level. Historically, they were governed by common law principles, but many states have since enacted statutory restrictions. Very few states, such as California, have passed an outright ban along the lines of the FTC proposal. Instead, most have either regulated the terms of such agreements or imposed restrictions involving employees in certain occupations or those paid less than a certain amount. Thus, most state laws would be “superseded” (i.e., preempted) by the proposed rule.
4. The ban on non-competes has bipartisan support in Congress, with some Republicans opposing non-competes as undue restrictions on the flow of commerce.
Historically, congressional Republicans have aligned with the business community in resisting new restrictions on employment practices. However, because of the potential impact on the flow of commerce, the noncompete issue has drawn some Republican support. The bipartisan “Freedom to Compete Act,” introduced in the previous Congress, would impose a broad ban on noncompete agreements, with no exceptions, along the same lines at the FTC proposal. Sen. Marco Rubio (R-FL), the bill’s lead sponsor, has justified the ban by stating:
American economic success has always relied on the power of free competition. Noncompete agreements directly restrict free competition in the labor market, prohibiting employees’ freedom to join or start a competitor after they depart their current employer.
5. The proposed rules are only the beginning of a long journey, with legal challenges and legislation likely to follow.
The FTC is expected to issue a final rule later this year and certainly by the end of the current administration’s term at the latest. Business community opponents are already promising a challenge in the courts, arguing that the FTC lacks statutory authority for the rules. The rule’s opponents feel emboldened by the U.S. Supreme Court’s demonstrated hostility to regulations, particularly when agencies expand their reach into new areas of federal regulation. However, regardless of what the courts decide, there is a chance Congress would act, given the aforementioned bipartisan hostility to non-compete agreements. A bipartisan group of senators led by Sens. Chris Murphy (D-CT) and Todd Young (R-IN) reintroduced the “Workforce Mobility Act,” which, like the proposed FTC rule, would ban all non-compete agreements except in limited cases of business sales. A separate bill is also expected to be reintroduced this Congress by Rep. Mike Garcia (R-CA), which would prohibit non-competes only for non-exempt employees (employees subject to FLSA overtime pay requirements). Both bills stalled in previous Congresses.
