Written by Christine Walters
For years, federal agencies, Congress, and states have been scrutinizing employers’ use of restrictive covenants. Common examples are employers’ use of employment agreements like non-compete, non-disclosure, and no-solicitation.
In 2016, the Federal Trade Commission published, “Antitrust Guidance for Human Resource Professionals.” In 2019, the FTC announced its “No Poach Approach.” Reminding employers that when they agree to not hire one another’s workers, they limit competition for labor, which gives rise to anti-trust inquiries.
In 2021, the White House issued its own statement announcing 72 initiatives by more than a dozen federal agencies “to promptly tackle some of the most pressing competition problems across our economy.” One initiative included, “…banning or limiting non-compete agreements.”
Now, in February 2023, the FTC published a proposed rule that would effectively ban all new and existing non-compete agreements used by employers. Concurrently, Congress reintroduced (for the 2nd time) the Workforce Mobility Act, which proposes to do the same, but only prospectively.
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 It would also require employers to rescind existing non-competes and actively inform workers that they are no longer in effect.
The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as non-competes.
Many anticipate legal challenges to the FTC’s proposed rule, suggesting it has not presented sufficient evidence that non-compete agreements constitute “unfair competition” under the FTC Act; if the FTC has the authority to issue the rule as proposed, and/or if the FTC has usurped Congressional authority by issuing a rule rather than letting Congress pursue its legislative process. I wonder if the proposed rule does not establish an unconstitutional taking as applied to existing non-competes for which an employer has already paid the worker some compensation, such as a sign-on bonus, as consideration for the worker signing the agreement.
Take heed. This proposed rule might impact employee handbooks and policies, even where no written agreement exists. The FTC asks, “whether noncompete clause should be defined not only as a contractual term between an employer and a worker, but also as a provision in a workplace policy.” Remember to comply with your state (and local) laws, too. There are at least 35 states and the District of Columbia that restrict employers’ use of non-competes, including Maryland.
Talk to your company’s legal counsel and submit your comments to the FTC here: regulations.gov/commenton/FTC-2023-0007-0001 The deadline to submit comments is March 20.
