This decision has the potential to significantly impact millions of employees and reshape the dynamics of the American workforce.
Why the Crackdown on Non-Compete Agreements?
Non-competition clauses restrict employees from taking jobs with competing companies within a certain timeframe after leaving their current position. The FTC argues that these clauses stifle competition by limiting worker mobility and potentially suppressing wages. By preventing workers from seeking better opportunities elsewhere, employers could hold down salaries and restrict career advancement. The FTC received over 26,000 comments, with thousands of workers describing how noncompetes blocked them from taking a better job, negotiating better pay, or starting their own business. The FTC also heard from entrepreneurs and small businesses who said noncompetes prevented them from starting new ventures or hiring knowledgeable workers to help grow their businesses.
The New Landscape: What This Means for Workers and Businesses
The FTC’s rule prohibits employers from imposing non-compete agreements on most employees. This applies to a wide range of workers, from low-wage hourly staff to mid-level professionals. However, there is a carve-out for senior executives with a significant decision-making role within the company. Specifically, the final rule defines the term “senior executive” as workers earning more than $151,164 who are in a “policy-making position.” Existing non-compete agreements for most workers will also be rendered unenforceable. Employers are required to rescind these agreements and notify affected employees.
The rule includes an exception that allows noncompetes between the seller and buyer of a business. The exception only applies to non-compete agreements with substantial owners of the business being sold. The FTC defines a substantial owner as someone holding at least a 25% ownership interest in the business entity (ownership stake, membership, or partnership). The FTC acknowledges that the buyer has a legitimate interest in protecting confidential information and customer relationships in a business sale scenario. The seller, who is a significant owner and likely possesses this knowledge, might be restricted from competing with the buyer for a reasonable period. Consistent with long-standing precedent in the majority of US jurisdictions: The non-compete clause for substantial owners should be reasonable in terms of geographic scope and duration of the restriction.
Benefits and Potential Challenges
The FTC’s decision is expected to have a positive impact on workers. Increased mobility could lead to higher wages as employees can leverage their skills across different companies. Additionally, workers will have greater freedom to pursue career advancement opportunities without geographical or competitive restrictions. However, some business groups argue that the ban on non-compete clauses could hinder innovation and trade secret protection. Companies might be hesitant to invest in training employees if they fear losing them to competitors readily and this rule (if it remains intact) has the potential to make an already tight labor market, even tighter.
The Road Ahead: Legal Challenges and Implementation
The legality of the FTC’s rule is likely to be challenged in court. Businesses opposed to the ban may argue that the FTC is overstepping its authority and all roads point to an eventual forum before the US Supreme Court. We also anticipate immediate challenges once the law goes into effect by virtue of multiple filings for injunctions in jurisdictions perceived to be “employer-friendly”. These challenges could lead to delays or modifications in the rule’s enforcement as legal battles unfold.
The Final Rule: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
The Fact Sheet: https://www.ftc.gov/system/files/ftc_gov/pdf/Non-Compete-Fact-Sheet.pdf
