Non-compete agreements are typically signed at the beginning of a business relationship, such as when a new employee is hired. If the employee leaves the job, the agreement usually stipulates a time period that he or she may not engage in business activities that would compete with the employer.
The Federal Trade Commission (FTC) has proposed a new rule that would ban employers from imposing non-compete agreements on their workers.
Why is the FTC Proposing to End Non-Compete Agreements?
The FTC believes that non-compete agreements are an exploitative practice that ties workers’ hands and keeps them less mobile in the job market. The agency estimates that banning non-compete agreements could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
What is the Impact on Employers if Non-Compete Agreements are Banned?
Elimination of non-compete agreements may create a substantial burden for employers. The proposed rule not only would prohibit standard non-compete agreements, which would make employers vulnerable to leaks of trade secrets and confidential information, but it also attempts to enforce what may be called “de facto non-compete clauses.” For example, a de facto non-compete clause might be in effect if the agreement requires the employee to repay substantial training costs.
In addition, if the proposed rule goes into effect, employers will be required to formally rescind all of their non-compete agreements and give notice to current and former workers of the rescission, a massive effort.
What Happens Next?
Employers should review the potential impact that this change would have on their employment practices. The FTC is seeking public comment on the proposed rule over a 60-day period. Enforcement may begin 180 days after publication of the final rule; however, it is expected to face court challenges.
Employment law attorneys say that the final ruling will be shaped by the comments submitted, including legal and practical objections to the rule. Concerned parties are advised to submit thorough comments that explain their concerns, including the potential costs and adverse effects on their businesses.
MarathonHR offers counsel on policies and procedures related to your hiring practices. Please contact us for assistance if you believe that eliminating non-compete agreements would hurt your business.