The employment community is anticipating that the Federal Trade Commission (FTC) will vote shortly on a new rule that—subject to limited exceptions— could ban employers from including non-compete clauses in employee agreements. In summary, a non-compete clause is a contractual agreement between an employer and employee that restricts the employee from working for a competing employer or otherwise engaging in competitive business, usually within a certain geographic region, and for a specific period of time after the employee stops working for the employer.
In support of the proposed rule, which was issued in January 2023, the FTC highlights the disproportionally negative impact that the agency states that non-compete clauses can have on workers by limiting their employment opportunities, hampering the creation of new businesses, and generally discouraging entrepreneurship. The FTC’s proposed rule aligns with nationwide trends both at the state and federal level that call for increased scrutiny of restrictive covenants, such as non-compete clauses in employment agreements. A number of states including Massachusetts, California, Minnesota, and Maryland, have already enacted new laws that broadly limit the use of non-competes, while other states such as New York are expected to follow suit in the near future.
The FTC is not the only federal agency that has recently been openly critical of non-compete clauses. On May 30, 2023, General Counsel for the National Labor Relations Board (NLRB) issued a memo, that while not legally binding, asserts that many non-competes, in addition to other restrictive covenants found in employment agreements, may be unlawful and unenforceable.
While the FTC’s Final Rule may choose to adopt the proposed rule as is, or modify it in some way, it is expected to face immediate legal challenges. Regardless of whether legal challenges to the FTC’s Final Rule are ultimately successful, it is indicative of a rapidly changing environment that will likely continue to see legal challenges to non-competes and other restrictive covenants.
Bennett & Belfort, P.C. will keep abreast of legal developments relating to all aspects of employment agreements, and stand ready to provide the guidance and advice you need when considering entering into or offering any such agreements.
