The Federal Trade Commission (FTC) has proposed a new rule that would bar employers from imposing non-competition agreements on employees, independent contractors, volunteers, interns, and other workers. Not only would the proposed rule render such agreements void, it would also require employers to affirmatively retract any existing non-competition agreement. The rule would not apply to either non-solicitation agreements or non-competition agreements associated with the sale of a business.
The FTC issued the proposed rule on January 5, 2023, with a 60-day comment period will follow. In a statement, the FTC touted the proposed rule as likely to increase employees’ wages by making it easier for them to move between jobs. If adopted, the rule will likely be subject to legal challenges. If enacted, the FTC’s rule would have a significant impact on both employers and employees throughout the U.S.
The rule would supersede any less restrictive state laws governing non-competition agreements. For example, at present, Massachusetts employers can lawfully bind “exempt” workers (i.e. those workers not entitled to overtime under federal law) to non-competition agreements, so long as certain criteria are met within the agreement itself. And, upon an employees’ voluntarily separation from employment or in instances where employees are terminated for “cause,” those agreements are often enforceable in Massachusetts. Also generally enforceable in Massachusetts are non-competition agreements between employers and employees (including “non-exempt employees”) that pre-date the Commonwealth’s non-compete law, G.L. c. 149, § 24L. If the FTC’s proposed rule becomes law in its current form, all non-competition agreements will be unlawful – except for those arising from the sale of a business – in Massachusetts and nationwide.
The FTC’s move mirrors the increase disfavor with which legislatures and courts have begun to view non-competition agreements in recent years. Some states, such as California and Hawaii, already ban many or all non-competition agreements. And not only has the Massachusetts legislature restricted non-competition agreements in recent years; courts here have demonstrated increased judicial scrutiny over such agreements. For example, in 2022, B&B partners Eric LeBlanc and Michaela May defeated a salon’s efforts to enforce a non-competition agreement involving a stylist on whose behalf this firm had brought a wage-and-hour class action. Among other reasons, the judge of the Boston Litigation Session of the Suffolk Superior Court found that the non-competition agreement was unenforceable because the salon did not have a legitimate business interest in restricting the stylists’ ability to compete with her former employer.
Bennett & Belfort’s attorneys will be tracking developments of the FTC’s proposed rule and will continue to advise our clients with a full view of these complex legal developments.