The Federal Trade Commission (FTC) recently proposed a new rule that would prohibit employers from requiring their employees to sign noncompete agreements. This would have a national impact and would supersede any contrary state laws. The proposed rule would only apply to employment contracts, and would not affect non-competes between buyers and sellers of companies.
Over the past few decades, noncompete agreements have become much more commonplace. Whereas these agreements were once more common among top executives with substantial insider knowledge, they are now commonplace among lower-level employees and front-line workers. According to a 2019 study by the Economic Policy Institute, a quarter of respondent companies whose average wage was less than $13 per hour reported that they require non-competes from all of their workers. Overall, the FTC estimates that about one in five American workers are bound by a noncompete agreement.
The FTC’s proposal is part of a national trend. Earlier this year, Washington, D.C. restricted non-competes to highly compensated individuals. Even for highly compensated individuals, noncompete agreement are limited to one year and must have a specific scope. In Maryland, non-competes are prohibited for workers who make $15 per hour or less, and all non-competes must be reasonable in scope. Virginia also prohibits non-competes for low-wage workers and requires all non-competes to be no more restrictive than is necessary to protect the employer’s interests.
Why are non-competes becoming more restrictive?
By their nature, noncompete agreements act as a restriction on trade and are inherently anti-competitive. A worker who hears about a higher-wage job with a competitor cannot move companies if they are subject to an enforceable noncompete agreement. That takes away the worker’s most effective way of improving their income and working conditions.
Even though American workers have become immensely more productive since the 80’s, real wages have gone down for most workers. Some theorize that the eliminationof noncompete agreements could allow workers to see the wage growth they’ve earned.
On the other hand, noncompete agreements can be extremely useful for small start-up companies or emerging industries who need to keep their secrets very close. Companies that depend on non-competes to survive may find the FTC’s rule to be too restrictive.
What do employers need to know?
The FTC’s proposed rule is only a proposal at the moment. It must go through a public comment process, which is open through March 10. The agency must then review the submitted comments and may amend the proposal before it becomes final.
If the rule goes into effect as it is currently written, employers would be required to refrain from including non-competes in all employment contracts, and they would have to notify existing employees that their noncompete agreements are void.