Recently, the FTC proposed a new rule to ban noncompete clauses in employee contracts. The FTC, or Federal Trade Commission, is seeking public comment on the rule. In the meantime, business owners need to understand the impact that the rule could have on their hiring and retention efforts.
The Proposed Rule
The FTC’s proposed rule would prevent employers from including noncompetition clauses in their contracts with employees. It also would prevent employers from entering into stand-alone noncompetition agreements.
More specifically, the rule would make illegal the following practices:
- Keeping an existing noncompete agreement with a worker
- Entering into or attempting to enter into a noncompete agreement with a worker
- Representing to a worker that the worker is subject to a noncompete agreement
Business owners should know that the proposed rule would apply to anyone who works for an employer – paid or unpaid. That includes independent contractors, employees, and volunteers. Employers who have noncompete agreements with workers would have to rescind these agreements and affirmatively inform workers that the agreements are no longer effective.
What Is a Noncompete, Exactly?
Noncompetition clauses and agreements (commonly called “noncompetes”) typically restrict employees from seeking employment with other companies in the same industry and geographic area. In other words, an employee who signed a noncompete with a local employer might be prevented from jumping ship and working for a local competitor in the same line of business.
Notably, the FTC’s proposed rule banning noncompetes would not apply to other kinds of employment contracts. Business owners often want nondisclosure agreements, confidentiality agreements, or other restrictions on sharing information. In general, the rule would not affect your ability to require employees to sign these kinds of contracts, as long as they do not effectively function as noncompetes. If you have questions about the scope of your existing agreements, don’t hesitate to reach out to local business lawyers like Henke & Williams, LLP.
The FTC’s Recent Enforcement Efforts Against Restrictive and Coercive Noncompetes
The FTC’s proposed rule banning noncompetes appears to be part of a general enforcement effort by the Commission against agreements that some perceive to be unfairly restrictive or coercive. The press release regarding the proposed rule points out that Section 5 of the Federal Trade Commission Act “bans unfair methods of competition”. Recently, the FTC has taken action against companies that required low-wage employees to sign noncompetes or required noncompetes that were preventing newer companies from hiring skilled workers.
The FTC argues that banning noncompetes will increase worker earnings and save consumers money on health care costs. But it also says that the ban will “double the number of companies in the same industry founded by a former worker”. For employers trying to protect their businesses from employee poaching and leaked confidential information, a ban on noncompetes could make life difficult.
Business owners should take heed of these bellweathers from the FTC when they decide whether to have employees sign noncompetes. They also should obtain legal advice regarding the scope of the agreements they use. If you need advice on your existing agreements or help protecting your business with new agreements, you should reach out to a business lawyer near you. A business lawyer can review your company’s needs to determine which agreements would benefit you. If the proposed ban on noncompetes goes into effect, your lawyer can prepare other agreements that you may need to keep confidential information in house.
Legal Help for Business Owners
As experienced Houston business lawyers, Henke & Williams, LLP help our clients find the best solutions possible for their needs. We customize our advice to your business’s unique situation. Whether you need assistance with noncompetes or advice during a business divorce, reach out to us. To set up a consultation, call 713-940-4500 or use our convenient Contact Form.