Attorney At Law
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule which, if issued, would ban employers from imposing non-compete clauses on its employees. The rule would prevent employers from entering into non-compete clauses with any worker, regardless of their level, circumstance, or salary. This would even apply to independent contractors.
The rule would also require employers, within 180 days, to rescind any existing non-compete agreements and to actively inform their employees that the agreements are no longer in effect. The FTC claims that non-compete clauses hurt workers and prospective employers and thus are an unfair method of competition. This rule would remedy that problem and allow for more fairness in the workforce.
What Is a Non-Compete Clause?
A non-compete clause is a legal agreement that restricts employees from taking a job with a competitor of their employer or starting a business that competes with their employer. The agreements also generally prohibit an employee from sharing any proprietary knowledge or secrets they obtain during the course of their employment with other parties. This agreement is often a component in a broader employment agreement but can also be a stand-alone document.
By signing such a covenant, the employee is agreeing to not enter into competition with their employer during or after their employment for the length of time specified within the non-compete clause. These clauses have been widely used across many industries, but that may soon change. The FTC estimates that one in five American workers (over 30 million) are currently bound by a non-compete agreement. California, North Dakota, and Oklahoma currently have laws in place banning non-compete agreements.
Why Is the FTC Considering This Ban?
This ban is being considered, according to the FTC, for many reasons, including the following:
- Non-compete agreements are preventing workers across all industries from seeking out opportunities that offer higher pay or better working conditions.
- Non-compete agreements are preventing prospective employers from hiring qualified workers with relevant experience in the industry.
- These agreements significantly reduce workers’ wages as they restrict workers from moving freely; they also allow employers to suppress wages and avoid having to compete with other employers to attract potential employees.
- The FTC claims that non-compete clauses stifle innovation by hindering new business and new ideas, highlighting the healthcare sector as a particularly important demonstration of these effects.
- Such agreements serve to take advantage of workers and inhibit economic freedom, as workers bound by non-competes are left with significantly diminished bargaining power when compared to that of their employer. This is creating an environment where many workers are forced to stay in jobs that they would rather leave as non-compete clauses are so standard they’re seen as an integral part of an employment agreement.
- Non-compete agreements are not the only way to protect trade secrets and proprietary knowledge from being used unfairly. While many employers justify using non-compete agreements for the purposes of protecting their intellectual property, the three states that already have outlawed non-compete agreements have had no increase in such problems, which indicates that there are other ways that important information can be protected.
The FTC estimates that the proposed rule would increase workers’ earnings across the workforce by nearly $300 billion each year, double the number of existing companies founded by a former worker in their industry, and save consumers up to $148 billion annually on health care. Research also indicates that this ban would close racial and gender-based wage gaps by 3.6 to 9.1 percent.
The issuance of this Notice of Proposed Rulemaking (“NPRM”) has commenced a 60-day period in which the public is invited to provide comments on the proposed rule. The FTC is specifically seeking input regarding whether franchises should be covered by this rule, whether senior executives should be exempt from this rule or have a modified circumstance, and whether low-wage and high-wage workers should be treated differently under this rule. For further information, a fact sheet provided by the FTC can be found here.
Fueled by Passion. Built on Trust.
Signing an employment agreement, especially one involving a non-compete agreement, is not a task to be taken lightly and it can have a long-lasting impact on your career. Having a skilled employment agreement attorney by your side to guide you through the process is the best way to protect your rights and ensure that you are making well-informed decisions about your future. The experienced employment law team at Vaziri Law LLC is well-equipped to support you in any and all of your employment law needs. Our firm proudly serves the people of Chicago and its collar counties, including Cook County, DuPage County, Kane County, Lake County, McHenry County, and Will County. Contact us today to learn more about how we can help.