In a move that is both controversial and significant, the Federal Trade Commission has proposed a new rule that bans the use of non-compete agreements. The proposed rule is open for public comment for 60 days.
The FTC alleges that “de facto” noncompetes harm consumers and hinder innovation. It also claims that these contracts hinder competition in the United States labor market.
For the first time, the FTC has asserted its statutory authority to restrict the unfair uses of noncompete clauses. Under Section 5 of the FTC Act, the agency has the power to curtail unfair methods of competition.
Specifically, the Proposed Rule would prohibit the maintenance or enforcement of noncompetes in employment relationships. It would also require employers to rescind existing noncompete agreements and inform their employees of the terms.
Noncompetes are generally used to limit a worker’s ability to work in the same industry after leaving their employment. However, they can also serve as bargaining chips to attract higher wages.
A noncompete is often used in conjunction with other restrictive covenants, such as trade secrets, to protect valuable business assets. Several states already have laws on the books, but the FTC’s new proposal could drastically change the way non-competes are used.
Currently, the FTC’s regulatory efforts against common employment practices include a number of consent orders against companies that impose non-competes and other restrictive covenants on workers. These agreements, which are banned by several states, are often used by workers across industries.
There is no doubt that some non-competes have gone too far. However, there it is also clear where a narrow and focused non-competes simply make good sense. We will see if the commission find a third way between no non-competes and those that go too far.
Parzivand is an attorney in Houston, Texas that focuses on labor law. He is a long time contributor on the Price of Business show. Learn more about him at www.Parzfirm.com.
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