FTC Bans Non-Compete Clauses in Employment Agreements
FTC Bans Non-Compete Clauses in Employment Agreements
FTC VOTES TO BAN NON-COMPETES
In a 3-2 vote on Tuesday, the Federal Trade Commission moved to ban the use of non-compete clauses in employment contracts nationwide. The new rule prohibits employers from entering into or enforcing agreements that restrict workers from joining a competitor, typically for a period of time after leaving a company.
WHO DOES IT APPLY TO?
The FTC's ruling applies to all private employers regardless of size, employee role, or industry. The only exceptions are for certain financial institutions, government entities, and non-profits that are exempt from the Federal Trade Commission Act.
WHAT DOES IT BAN?
Under the new rule, employers are not only barred from including non-compete provisions in future contracts, but must also notify current and former employees that existing non-compete agreements are now void. This requirement ensures workers are aware of their right to seek employment freely.
OTHER RESTRICTIVE COVENANTS NOT AFFECTED
While the rule focuses specifically on non-compete clauses, other restrictive covenants like non-solicitation or non-service agreements may still be permitted as long as they are not so broadly written that they effectively prevent an employee from working in the same field after leaving a company. Certain "garden leave" arrangements, where an employee remains on payroll but cannot work for a set period, may also be allowed depending on how they are structured.
RATIONALE
The FTC estimates that banning non-competes could increase workers' earnings by nearly $300 billion per year by improving labor mobility and reducing wage suppression. However, business groups are likely to challenge the rule in court, arguing it exceeds the FTC's authority and will harm companies' ability to protect trade secrets and investments in employee training.
TIMING
For now, the rule is set to take effect 180 days after publication in the Federal Register. However, legal challenges and a 60-day public comment period could lead to revisions before a final version is implemented.
CONCLUSION
The bottom line is that the FTC's action marks a major shift in U.S. employment law that aims to give workers more freedom and bargaining power. Employers should immediately review employment agreements with counsel to ensure compliance and explore alternative ways to safeguard confidential information and human capital. Employees should be on the lookout for required notices from current or former employers, voiding any non-compete clauses.
The sweeping effects of this rule are just beginning to unfold, but it's clear the balance of power between companies and workers is set for a significant recalibration. We'll be closely tracking further developments and impacts across industries.
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Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.
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