By Bill Josey, Editor, Staffing Legal News - 11 Jan 2023
On January 5, 2023, the Federal Trade Commission published a proposed regulation flatly banning all employee noncompete agreements, defined as any agreement that expressly or functionally “prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
Unlike most laws, the regulation applies retroactively. But it goes even further and requires employers to formally “rescind” existing non-compete agreements. It then requires employers to notify existing and former employees in writing that their non-competes are no longer in effect and that they are free to “compete…at any time following your employment…”
Notably, the regulation does not address agreements that prohibit use of confidential information, solicitation of clients and employees, and “non-dealing” agreements that prohibit doing business with an employer’s clients for some period of time. However, the regulation instructs that such agreements could be deemed “functional” non-compete agreements if written in a manner that unduly restricts a former employee’s ability to earn a living.
The breadth of the FTC’s proposal is surprising, but the topic is not new. In October 2016, the Obama Administration issued a “State Call to Action on Non-Compete Agreements” urging state legislatures to ban enforcement noncompete agreements for certain categories of U.S. workers, including all involuntarily terminated employees. You can read about it here. The proposal went virtually nowhere, other than a few states making tweaks probably would have made anyway. That this request was directed to the states is instructive. The regulation of non-compete agreements has long been the province of the states. As of today, all but a handful of states permit some form of non-compete agreement between employer and employee.
In early 2020, the FTC held a public workshop on the subject of restricting non-competes and received public comments. In its comment, the U.S. Chamber of Commerce argued that the states were best suited to regulate in this area, as they have historically.
Nevertheless, in July 2021 President Biden signed an Executive Order directing over 12 federal agencies to initiate measures to improve competition in a wide swath of fields, including the labor markets. The Order included encouragement to the FTC to ban or limit employee non-compete agreements. The FTC, which became controlled by Democratic appointees in May 2022, obviously warmed to the task and rapidly produced the subject regulation, which is creating quite a stir in U.S. business circles.
The Regulation is Likely Unlawful and Unenforceable
I used the word “likely” in the title to this section, but I'm going to stick my neck out and assert that this regulation, if passed as structured, will not stand up to legal challenge. The U.S. Chamber of Commerce has already drawn the battle lines with this statement:
Today’s action by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful. Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand.
Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.
Got that? Not just unlawful, but "blatantly unlawful" says the Chamber. Agencies like the FTC can only regulate with the authority given to them by law. Put another way, federal agencies cannot make law, only interpret and regulate existing law. The proposed regulation clearly attempts to make law and can best be described as a wish list item by the newly appointed FTC majority. That is not to say that some form of lawful regulation will not come out of this process, which is only just beginning. And the fact is that non-competes are under attack on all levels and will continue to be.
You Should Consider Ending the Use of Geographic Non-Compete Agreements Anyway
With non-compete agreements under attack, staffing and recruiting firms should consider, in consultation with their attorneys, eliminating geographic non-compete terms in their restrictive agreements in favor of trade secret, confidential information, non-solicitation and non-dealing provisions. In particular, non-dealing covenants are widely enforceable when limited in scope, and judges are less likely to look for ways to invalidate them, as they tend to do with geographic non-competes. A non-dealing clause reads something like this: “For a period of one (1) year after termination of employment with Employer, Employee agrees that he/she will not directly or indirectly solicit or accept business from Clients or Prospective Clients with whom Employee had contact while employed by Employer.” Sometimes the words "or about whom they had confidential information" are added. Such clauses are considered benign when compared to geographic non-competes, because the universe of available staffing and recruiting clients these days is very broad. In the ordinary course of events, the employee will be able to engage in the business at a competitor - just not the business your firm paid him or her to develop or maintain. Keep in mind that laws vary from state to state, and it is important to consult with a knowledgeable attorney before taking action.
Bill Josey provides freelance and fractional general counsel services to the staffing and recruiting industry and publishes Staffing Legal News, the only source for real time reports on staffing industry litigation and legal affairs.