The Federal Trade Commission has proposed a rule that would ban the use of noncompete clauses. The Employment Law Practice Group at KingSpry is keeping abreast of these changes.
What are noncompete agreements?
More than 30 million workers—at least 18 percent of the U.S. workforce—are required to sign noncompetes as a condition to accepting a job. A noncompete agreement is a contractual clause that prevents an employee from working for a competitor during or after their employment period. Employers often use noncompete agreements to protect trade secrets, intellectual property, confidential information, client lists, and investments.
What do Pennsylvania employers need to know?
Generally, Pennsylvania Courts have enforced noncompete agreements if a protectable interest exists and the restrictions are reasonably necessary. Though enforceable, the Pennsylvania Supreme Court has made it clear that noncompete agreements are unfavorable in the Commonwealth. Moreover, a growing interest in banning noncompete agreements persists across the nation.
On January 5, 2023, the Federal Trade Commission (“FTC”) published a proposal that would ban all noncompete agreements between employers and workers. If passed, this rule would not only ban prospective noncompete agreements but existing ones as well.
If enacted, employers will be required to rescind all active employee noncompete agreements within six (6) months of the effective date and must notify all employees, current and former, within forty-five (45) days.
What do employees need to know?
Experts project that the potential ban on noncompetes will boost wages by nearly $300 billion per year, narrow pay gaps, improve working conditions and allow employees to freely switch jobs. If the proposal is passed, employees will have much more freedom and flexibility as they pursue career advancements and opportunities, because noncompete clauses will no longer be legally binding upon employees. The ban would lift all noncompetes, even those employees have signed prior to its enactment.
What does this proposal mean for businesses?
Noncompete agreements are often a tool used to foster innovation and preserve competition. For example, an employee may have access to trade secrets of their employer, putting them and the business in a position susceptible to exploitation. Where a proper noncompete agreement would prevent the misuse of trade secrets, the proposed ban has the ability to heighten the likelihood of such disturbance.
Other issues businesses may face include: (1) a blur in the distinction between independent contractors and employees, (2) implications on franchise, license or joint venture agreements, and (3) discouragement of investment and innovation as trade secrets and intellectual property become more vulnerable.
If enacted, businesses that appropriately utilize noncompetes must adjust the manner in which their assets are protected. Businesses may need to explore the implementation of non-solicitation and non-disclosure agreements as well as other legal provisions in employment contracts.
What does the future hold?
Both employers and employees may share their opinions on this proposed rule via public comment. The FTC is accepting public comments from January 5, 2023, through March 6, 2023.
Now is the time for employers and business owners to be proactive. The FTC’s 60-day comment period should be utilized to review your business’s restrictive covenants. If you rely on non-compete agreements to protect your business assets, it is time to explore alternative options in the event that noncompete agreements are banned.
If you have any questions regarding your business’s noncompete agreements or the enforceability of alternative restrictive covenants, please consult with your solicitor or one of the employment attorneys at KingSpry.