THE FTC TAKES THE MONUMENTAL STEP OF BANNING MOST NONCOMPETE AGREEMENTS

Historically there has been an inherent imbalance of power between employers and employees in the workplace. Indeed, the employer-employee relationship in law used to be referred to as a “master-servant relationship”. www. law.cornell.edu. An example of this disparate power is found in noncompete agreements forced on employees which typically act to restrict the ability of employees to enter the marketplace to attain higher paying jobs and/or those with better work conditions. According to a recent article in the Washington Post more than 30 million employees or 18% of the United States workforce, have been required to sign noncompete agreements. Traditionally, noncompete agreements were created to protect a company’s trade secrets, confidential information, and competitive advantage. The primary purpose of noncompete agreements was supposed to be to prevent individuals from using proprietary information gained from their current employer for the benefit of a competitor or for their own self gain. However, the use of noncompete agreements has become so widespread that many employers now require low-wage employees, such as janitors, landscapers, and hairstylists, to sign these restrictive agreements. However, the pendulum appears to have finally swung in favor of employees as evidenced by the Federal Trade Commission (FTC)‘s enactment of a groundbreaking rule banning the use of noncompete agreements for most employees.

In its final rule banning the use of non-competition agreements enacted on April 23, 2024 (“the Non-Compete Ban”), the FTC in a 3-2 vote by its Commissioners concluded that such agreements constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act (FTCA), which ““declared” that “unfair methods of competition in commerce” are “unlawful,” and it “empowered and directed” the Commission “to prevent” entities subject to its jurisdiction from “using” such methods.” 15 U.S.C. 45(a). The FTC found non-disclosure agreements to be less burdensome alternatives to noncompete agreements since they enable employers to protect their proprietary and confidential information without violating fair competition.

The Non-Compete Ban states that noncompete agreements constitute an unfair method of competition and therefore employers are banned from the following:

• entering into new noncompete agreements with all employees, including senior executives;
• enforcing or attempting to enforce noncompete agreements; and
• telling someone that an employee is subject to a noncompete agreement.

The Non-Compete Ban will become effective 120 days after publication in the Federal Register after which employers will be required to notify affected workers of the prohibition on non-compete agreements. By implementing the Non-Compete Ban the FTC aims to level the employer-employee playing field by promoting a more dynamic and competitive job market. Employees can report employers who violate this new rule by reporting them to the Bureau of Competition.

The Non-Compete Ban is not unlimited and does contain exceptions. First, existing noncompete agreements for senior executives can remain in force, but new noncompete agreements with senior executives are strictly prohibited after the effective date of the rule. “Senior executives” are defined as workers earning more than $151,164 annually in policy-making positions. “Policy-making positions” include job titles such as president, chief executive officer and any equivalent role, and any other employee with policy-making authority within the company. Second, the rule allows the implementation of noncompete provisions if it stems from the bona fide sale of a business, the sale of the employee’s ownership interest in the business, or the sale of all or substantially all of the assets of a business. Finally, employers are still able to pursue claims against employees who violated the noncompete agreements prior to the effective date of the rule.

There should be no doubting that employers and their attorneys will eventually sue to overturn the Non-Compete Ban by arguing in court that it is too disruptive to business and how the FTC overstepped its legal bounds by enacting such a sweeping new rule. Along this same vein, Andrew Fergusion one of the two dissenting FTC Commissioners commented to the Washington Post that the FTC lacks, “the power to nullify tens of millions of existing contracts”, and further by taking the position that, “The administrative state cannot legislate because Congress declines to do so.”

Nonetheless, the FTC’s Non-Compete Ban as it presently stands represents a significant victory for workers’ rights and economic fairness. Eradicating these noncompete agreements promotes a more reasonable and inclusive work environment, enabling employees to pursue their professional goals without undue interference or constraint caused by noncompete agreements, and in doing so, gives workers the opportunity to explore different career paths, and negotiate better terms of employment without fear of legal consequences. This newfound freedom of employees to move between jobs and industries is essential for promoting creativity and entrepreneurship, all while driving economic growth. Simply put, the Non-Compete Ban creates a new era of opportunity and empowerment for workers throughout our country.

Click the link below for the article:

https://www.newjerseyemploymentattorneysblog.com/the-federal-trade-commission-takes-the-monumental-step-of-banning-most-noncompete-agreements/

Written By:  Mashel Law, L.L.C.