By Robert G. Brody and Mark J. Taglia
January 20, 2023
Last week the Federal Trade Commission (the “FTC”) proposed a rule banning companies from requiring workers to sign noncompete agreements. Currently, there are about 30 million workers (roughly 18% of the U.S. workforce) who are subject to such agreements. The FTC proposal would apply to all paid and unpaid employees, as well as independent contractors. And would even require companies to terminate existing non-compete agreements and inform their employees that their noncompetes are no longer in effect. This broad action essentially has no exemption.
Now that you have taken a minute to let that sink in, let’s discuss. The FTC is testing its authority to impose a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition. In proposing the new rule, the FTC argues such agreements suppress wages, restrict innovation, and limit entrepreneurs from going out and starting their own businesses.
Noncompetes are increasingly used across industries
The FTC said in a statement released last week that “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” Initially noncompetes were designed to restrict highly compensated professionals in finance and technology, but they are now being used across all industries, including minimum wage service employees. An Obama-era joint-study from the White House and Treasury found in 2016 that 15% of workers (without a college degree) and 14% of workers earning less than $40,000 were subject to noncompete agreements.
The counterargument to the FTC’s actions is that when properly used noncompete agreements can preserve competition and foster innovation. Without their protection, new ideas are too easily stolen to justify the time it takes to bring them to life.
What employers should do now
Companies should take this opportunity to assess where they stand on this issue. If they feel strongly about the negative impact such a band would have on their business, they should submit a comment to the FTC during its 60-day comment period. Alternatively, support an employer group that will speak out for you. The FTC open comment period runs through March 10 and the FTC is obligated to review each submission and consider changes based on the feedback provided.
Additionally, businesses should consider how such a ban may impact their business and evaluate if there are other mechanisms that could accomplish similar goals. For example, could you use non-solicit and non-disclosure agreements. In fact, should you have those agreements in place already? Or consider a contractual incentive to retain talent. This is particularly helpful if retaining talent is the issue and not losing intellectual property.
Scholars question whether Congress ever intended to delegate such broad sweeping authority to the FTC. Thus, you should expect several more hurdles before the new rules are implemented, including litigation up to the Supreme Court, which would delay implementation for years. And if this happens, we might have a new Administration before all the hurdles are cleared in which case, the FTC could be ordered to reverse directions and rescind the rule.
While few believe a full blown noncompete ban will be in place any time soon, momentum is building not just at the federal level, but at the state level, too. Whatever happens next with the FTC proposal, we can expect this trend to continue.
Brody and Associates regularly advises management on complying with the latest local, state and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.