On January 5, 2023, the Federal Trade Commission (FTC) announced that it has proposed a new rule that would ban employers from enforcing noncompete agreements against their workers.
In its news release the FTC stated, “Companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts. Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.”
The proposed rule would ban nearly all post-employment agreements not to compete between employers and employees. The proposed rule would not only prohibit companies from entering into future noncompete agreements with employees but would also make any current noncompete agreements already in effect unenforceable.
The current proposed rule does not prohibit the use of other commonly used restrictive covenants, like nondisclosure agreements, non-solicitation agreements, and no-poaching agreements. However, the proposed rule states that these restrictive covenants could be considered noncompete clauses if they are so unusually broad in scope that they function as a noncompete agreement.
As you may recall in 2021 Nevada joined a growing number of states in restricting noncompete agreements for certain employees. Assembly Bill 47, which amended NRS 613.195, prohibited noncompete agreements with employees paid solely on an hourly wage basis. It further restricted employers from taking action to enforce provisions that would prevent a former employee from working with a prior customer or client if the employee did not solicit the customer or client, the customer or client left voluntarily, and the former employee was otherwise compliant with the noncompete agreement.
The Notice of Proposed Rulemaking issued by the FTC proposes prohibiting employers from entering into non-compete agreements with workers on or after the effective date of the rule and requiring employers to take affirmative steps to formally rescind noncompete agreements entered into prior to the effective date by sending notice to affected employees. There is a limited exception in the proposed rule that permits certain noncompete agreements between a seller and a buyer of a business where the restricted party holds at least a 25 percent ownership interest in the business.
The proposed rule is open for public comment for a sixty (60) day period and following this period the final rule will be published. Pursuant to the Notice of Proposed Rulemaking the rule would become effective 60 days after final publication and that compliance would be required 180 days after final publication. As such, employers will have at least eight (8) months to get ready for this change.
As with many controversial actions taken by federal agencies, there is a high likelihood that there will be litigation over the proposed rule, which could delay or even prevent the proposed rule from going into effect. At this point in time employers do not need to make any changes to their current non-compete practices; however, it is recommended that employers keep up-to-date on developments with the proposed rule, so that they are prepared to make changes if/when the rule goes into effect.
