The Federal Trade Commission (FTC) recently proposed a rule prohibiting almost all noncompete agreements between employers and employees. Under the FTC’s proposed rule, employers could not enter new noncompete agreements with employees. They would have to rescind existing noncompete agreements by informing employees that they are no longer in effect. The changes would impact all industries and about 30 million workers. If adopted, the FTC rule would not take effect for at least 240 days and likely would face legal challenges.
According to the FTC, noncompete agreements adversely affect competition by preventing workers from pursuing better job opportunities and employers from hiring the best available employees. Noncompete agreements are contracts in which employees generally agree to refrain from accepting similar employment with a competitor, often for a specific period or within a specific geographic area, after leaving their employment.
Critics of the proposed rule argue that the FTC has overstepped its authority. Some believe that noncompete agreements protect companies’ confidential trade secrets, proprietary information, or future planning, so the FTC should not issue a blanket prohibition on noncompete agreements. According to the Society for Human Resource Management, a general ban on noncompete agreements would significantly endanger nonsolicitation and nondisclosure agreements.
While the fate of the FTC proposed rule and its exact contents are uncertain, employers should begin preparing for some restrictions on noncompete agreements now. For example, employers should consider carefully when noncompete agreements are necessary to protect legitimate business interests and whether less burdensome agreements, such as nonsolicitation, nondisclosure, or intellectual property agreements, would be sufficient.
To the extent employers determine that a noncompete agreement is necessary, they should have a reasonable justification for their need. For instance, it may be appropriate to put an agreement in place for higher-level employees with access to sensitive company information or who influence important customer relationships. Likewise, employers should ensure that noncompete agreements are reasonably tailored regarding geographical scope and duration. The agreements also should not unreasonably limit the pool of other companies for which an employee can work in the future. Finally, employers should ensure that their existing agreements comply with state laws concerning noncompete agreements, which may or may not be more restrictive than the FTC’s proposed rule.
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