Will the U.S. Government Prohibit Non-Compete Clauses?

 Posted on January 23, 2023 in Taxation Law

Many businesses rely on non-compete clauses in employment contracts, severance agreements, and other types of contracts. These clauses can help businesses protect their interests and prevent unfair competition by restricting former employees, independent contractors, or other types of workers from working for competitors or starting their own competing businesses. However, under the administration of President Joe Biden, the federal government is looking to take action to restrict the use of non-compete clauses or even prohibit them altogether.

Proposed FTC Rule Regarding Non-Compete Clauses

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would affect the use of non-compete clauses in the United States. Under this rule, the use of non-compete clauses would be defined as an "unfair method of competition," and employers would be prohibited from using these clauses in employment contracts or similar agreements. In addition, the rule would require employers to rescind any existing non-compete clauses and notify employees or other workers of this rescission. This rule would supersede any state laws or regulations that specify when non-compete agreements can or cannot be used.

Notably, the rule would not only apply to non-compete clauses that have been included in an employment contract or a similar agreement but also to "de facto" agreements that function in a similar fashion. For example, non-disclosure agreements that are so broad that they would prevent a person from working in the same field after leaving an employer would be considered to be non-compete agreements. Other contractual terms that would restrict a person's ability to seek future employment, such as the requirement to pay an employer for training expenses that are not functionally related to the actual costs of training the employee received, may also be considered to be non-compete clauses. Employers would also be prohibited from claiming or implying that a worker is subject to a non-compete agreement when they do not have a good-faith basis for believing that an enforceable non-compete clause applies to a person.

With this rule, the FTC is intending to help protect the rights of workers and improve people's career opportunities. Around 30 million people throughout the United States are currently covered by non-compete agreements, and they account for around 18 percent of the total workforce. The FTC has stated that with this rule in effect, wages for American workers could increase by almost $300 billion per year. However, opponents of this proposed rule have claimed that it is an abuse of the FTC's authority that would take away an important tool that many businesses use to encourage innovation and prevent unfair competition. The U.S. Chamber of Commerce has stated that it plans to file a lawsuit challenging the rule if it is put into effect.

Contact Our San Jose, CA Employment Contract Lawyer

While non-compete agreements have been beneficial for many businesses, the ability to use these clauses may change in the future. Companies who use these agreements will need to make sure they are following all applicable state and federal laws. At John D. Teter Law Offices, our San Jose employment contract law attorney can provide guidance on the use of these and other restrictive covenants, and we can help ensure that employment contracts and other types of agreements are legally sound. Our goal is to help our clients protect their rights and interests while avoiding issues that could lead to problems in the future. To learn more about how we can help address these concerns, contact us at 408-866-1810 to set up a consultation.

Sources:

https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking

https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition

https://www.cnbc.com/2023/01/12/us-chamber-of-commerce-threatens-to-sue-the-ftc-over-proposed-ban-on-noncompete-clauses.html