Agreements that limit an individual’s ability to compete with a former employer have been controversial and the subject of much legislation and litigation. Federal regulators have proposed a rule that would largely prohibit their use entirely. Consider the following…
My prior blog briefly discussed the common law rule regarding competition with employers by employees, both during and after employment, as well as the historic use of agreements that prohibit employees from competing with their employers after the employment ends (i.e., “non-compete agreements”). In short, despite much state legislative and judicial limitations on the use of non-compete agreements, they are generally enforceable in most states.
Federal limitation of non-compete agreements…
As discussed in my prior blog, the Federal Trade Commission (“FTC”) recently commenced legal proceedings against three specific companies seeking to prevent those companies from imposing or enforcing non-compete agreements with their employees. In January, the FTC proposed a new rule that would broadly prohibit the use of non-compete agreements with employees and independent contractors.
The 65-page proposal was published in the January 19, 2023 issue of the Federal Register. The discussion of the rule is quite expansive, but here are a few highlights:
- The prohibition would apply to every type of business entity employer;
- A functional test would be established to determine whether an agreement prevents an employee from seeking or accepting employment with another employer;
- Employers would be required to rescind existing non-compete agreements and notify employees that they are no longer bound by them; and
- The rule would preempt state laws to the extent the state law is inconsistent with the new rule.
Although non-compete agreements have faced challenges from state legislatures and courts, it seems clear that federal regulators have joined the battle against non-compete agreements in a formidable way.
By any estimation, if adopted, the rule would be a game changer. It would be prudent for employers to familiarize themselves with, and monitor developments in, the proposed rule. Please feel free to contact me if you would like more information about non-compete agreements or the FTC’s proposed rule.
PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.