Yesterday, the Federal Trade Commission announced a final rule that would ban almost all non-competition agreements for U.S. workers. Non-compete clauses are commonly included in employment contracts to prevent an employee from quitting one company to work for one of its rivals. These clauses usually restrict an employee from working in the same industry within a specific geographic area for a specific amount of time. For example, a typical non-compete clause may state that an employee who voluntarily resigns cannot work for another employer or start their own business in the same industry within 50 miles of the former employer’s location for a period of 6 months. These clauses are designed to protect the employer from losing customers to a former employee.
However, the FTC has determined that non-competition agreements are unfair to workers, depress wages, and inhibit the formation of new businesses, all of which are detrimental to the U.S. workforce. In January 2023, the FTC solicited public comment on its proposed rule banning non-compete agreements and received overwhelming support in favor of this change. The final rule is expected to be published in the Federal Register soon and will go into effect 120 days after publication.
The new rule prohibits employers from entering into new non-compete agreements and from enforcing most existing non-compete agreements against current or former employees. An exception is made for existing non-compete agreements with senior executives who earn more than $151,164 per year and who are in a policy-making position. These agreements can continue to be enforced, but the FTC estimates that this exception will apply to less than 1% of all agreements.
The ban will almost certainly be challenged in court by employers and pro-business groups, so only time will tell if this ban becomes the new law of the land. The ban does not impact non-disclosure agreements, which prevent an employee from sharing a company’s trade secrets or using confidential business information for the employee’s personal benefit.
Whether you are an employee with a non-compete clause in your contract or an HR manager drafting an employment agreement for a new hire, the experts at Best Law Offices can help you navigate the legal complexities of this developing issue. Contact us today for a free consultation!