Non-compete agreements have long been used in the business world to prevent employees from harming former employers. However, it appears that they will no longer be allowed in American enterprise — if the Federal Trade Commission (FTC) has its way. 

Non-Compete Clauses and American Business

Non-compete Clauses are now standard in many industries. But their ubiquity is no guarantee that this practice is fair. In fact, the FTC is taking action against their use because it and many industry experts believe these clauses to be unfair and harmful to employees.

In a basic non-compete contract, an employer typically looks to restrict a former employee’s business dealings in an effort to protect the company from harm. 

These agreements typically include restrictions on one or more of the following:

• Time: Preventing an ex-employee from doing something for a period of time
• Industry: Preventing an ex-employee from working in a specific industry
• Geography: Restricting an ex-employee’s business dealings to certain regions

Because non-compete clauses are designed to protect the business for whom the employee once worked, these clauses uniformly favor the business at the expense of the employee.

Depending on the scope of a particular non-compete agreement, an employee may face all manner of limitations that could lead to financial setbacks and loss of gainful opportunity and employment. 

These common consequences and ramifications of non-compete clauses are some of the reasons why the FTC decided to take action: 

• Restriction of job mobility, leading to lower-paying career opportunities
• Disproportionately negative effects on women and people of color
• Obstacles for workers who try to challenge a non-compete

Employers, on the other hand, argue that non-competes are essential to protect them from unfair business competition from former employees. They cite trade secrets and intellectual property risks as justification for using restrictive non-compete agreements. However, the FTC is not buying it.

FTC Action

The FTC has proposed a rule pursuant to Sections 5 and 6(g) of the Federal Trade Commission Act that would deem it unfair for an employer to enter into or attempt to enter into a non-compete clause with an employee. 

The rule would also deem it unfair for an employer to maintain a non-compete clause, which means that existing non-compete clauses will likely be considered invalid. 

In addition to calling non-competes unfair, the proposed rule also requires:

• The rescinding of all current non-compete clauses within 180 days
• Notification of affected employees within 45 days of rescinding the clauses
• The adoption of a test to identify hidden non-compete clauses

Workers who are affected by the new rule include employees, former employees, contractors, and volunteers. 

As you might imagine, there will likely be challenges to the rule if the FTC votes it into effect, including challenges to the FTC’s authority to make such a sweeping regulation. 

Typically, non-compete clauses are governed by the states. Some might see the rule as too far-reaching. 

There will likely be other challenges to the rule; employers might argue that the rule is too restrictive on the freedom to contract and that it unfairly leaves intellectual property and trade secrets exposed.

Ultimately, the courts will decide. 

The Current Status of Legislation

At the moment, the rule is not in effect. After it goes through a 60-day comment period, it will be voted on by the FTC. Until then, employers and employees do not need to take immediate action, but they should prepare for the passage of the rule and its consequences. 

The lawyers at NJ Employment Lawyers, LLC find effective solutions to non-compete issues in the state of New Jersey. Call our office and speak with an employment lawyer to learn more and get help.

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