January 20, 2023

The Federal Trade Commission Considering Rule Banning Non-Compete

Article Summary:

  • FTC proposes a rule banning non-compete agreements, affecting employees, contractors, and unpaid workers.
  • Employers must inform workers that non-compete agreements are void.
  • The rule aims to increase wages and job mobility, enhancing competition and innovation.

Legal Topics

EMPLOYMENT LAW UPDATE: FEDERAL TRADE COMMISSION ELIMINATES NON-COMPETE CLAUSES

On Tuesday, the Federal Trade Commission issued a new Rule putting an end to employment-related non-compete clauses. In its justification for the rule, the FTC called non-compete clauses “an unfair method of competition” and stated it is a “violation for [employers] to… enter into non-compete clauses (“non-competes”) with workers.” In today’s very competitive labor market, the new FTC Rule creates a significant disruption for employers.

WHEN IS THE FTC ELIMINATION OF NON-COMPETE CLAUSES SET TO TAKE EFFECT?

This new FTC provision—set to take effect in 120 days—renders existing non-compete agreements unenforceable. Existing non-compete agreements with senior executives will remain enforceable, although employers cannot require newly hired senior executives to sign such an agreement.

WHAT REQUIREMENTS HAS THE FTC IMPOSED ON EMPLOYERS BY ELIMINATING NON-COMPETE CLAUSES?

After the Rule takes effect, employers are required to deliver personal notice to employees (past and present) who signed a non-compete agreement informing them agreements are no longer enforceable. In the notice, employers must inform employees they are free to accept any job or start any business, even if it is directly competitive with the employer.

IS THE FTC’S ELIMINATION OF THE NON-COMPETE CLAUSES OPTIONAL FOR EMPLOYERS?

Compliance with the FTC Rule is not optional. Employers should consider new ways they can protect against a former employee gaining a competitive advantage by using the employer- provided training, the relationships made possible by the employer, or the confidential information learned from the employer. RMP can assist you in navigating this disruption and can provide advice on how to most effectively protect your vital business interests going forward.

RMP: Your Employment Law Attorneys

RMP Attorneys At Law has an experienced Employment Law Attorney team dedicated to helping you navigate these changes. If you have any questions or would like guidance, reach out to one of our employment attorneys, Tim Hutchinson, Seth Haines, Larry McCredy, or Taylor Baltz or call  479.443.2705.

On January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking prohibiting employers from imposing non-compete agreements on their workers.

The proposed rule would not only make it illegal for an employer to enter or attempt to enter into a non-compete agreement with a worker but effectively rescind all existing non-compete agreements in effect. 

What Does the Proposal Entail?

Further, the employer would be tasked with notifying its workers who were previously subject to non-compete agreements that they no longer are. What is important, the FTC’s expansive definition of the term “worker” would include independent contractors and unpaid workers, in addition to traditional employees.

The FTC estimates that the proposed new rule could potentially increase wages by nearly $300 billion per year and expand the career opportunities for roughly 30 million Americans. In coming to this conclusion, the FTC claims that non-compete clauses reduce competition in labor markets as it suppresses earnings and opportunities for workers who are constrained by the non-compete agreement and those who are unconstrained.

They reason that workers constrained by a non-compete agreement are blocked from switching to higher-paying jobs, denying the opportunity for unconstrained workers to replace them. By restraining job mobility, the overall job market suffers since there are fewer job offers, resulting in an overall wage drop. Thus, firms have less incentive to compete for workers by offering higher pay, better benefits, or other more favorable conditions.   

The FTC contends that non-compete agreements prevent skilled workers from starting their own businesses while limiting the talent pool available for startups to hire. Further, the FTC argues that non-compete agreements reduce innovation and competition in product and service markets by decreasing the flow of information and knowledge among firms. Thus, product quality is reduced while prices are raised for consumers. 

Conclusion

This proposed new rule comes on the heels of a recent FTC decision to bolster its powers under Section 5 of the FTC Act, which allows the Commission to ban “unfair” methods of competition.

The FTC invites the public to submit comments on the proposed rule for review. The FTC will then review the comments and make any changes it deems necessary changes into a final rule.

At RMP Law, we focus our specialized legal expertise on business law, estate planning, probate, trust, commercial litigation, taxation law, tax planning, and more for individuals, families, and businesses. Get started today.


RMP Business Law Attorney Arkansas

Disclaimer:

The information provided on this website does not constitute legal advice. Instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.


On January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking prohibiting employers from imposing non-compete agreements on their workers.

The proposed rule would not only make it illegal for an employer to enter or attempt to enter into a non-compete agreement with a worker but effectively rescind all existing non-compete agreements in effect. 

What Does the Proposal Entail?

Further, the employer would be tasked with notifying its workers who were previously subject to non-compete agreements that they no longer are. What is important, the FTC’s expansive definition of the term “worker” would include independent contractors and unpaid workers, in addition to traditional employees.

The FTC estimates that the proposed new rule could potentially increase wages by nearly $300 billion per year and expand the career opportunities for roughly 30 million Americans. In coming to this conclusion, the FTC claims that non-compete clauses reduce competition in labor markets as it suppresses earnings and opportunities for workers who are constrained by the non-compete agreement and those who are unconstrained.

They reason that workers constrained by a non-compete agreement are blocked from switching to higher-paying jobs, denying the opportunity for unconstrained workers to replace them. By restraining job mobility, the overall job market suffers since there are fewer job offers, resulting in an overall wage drop. Thus, firms have less incentive to compete for workers by offering higher pay, better benefits, or other more favorable conditions.   

The FTC contends that non-compete agreements prevent skilled workers from starting their own businesses while limiting the talent pool available for startups to hire. Further, the FTC argues that non-compete agreements reduce innovation and competition in product and service markets by decreasing the flow of information and knowledge among firms. Thus, product quality is reduced while prices are raised for consumers. 

Conclusion

This proposed new rule comes on the heels of a recent FTC decision to bolster its powers under Section 5 of the FTC Act, which allows the Commission to ban “unfair” methods of competition.

The FTC invites the public to submit comments on the proposed rule for review. The FTC will then review the comments and make any changes it deems necessary changes into a final rule.

At RMP Law, we focus our specialized legal expertise on business law, estate planning, probate, trust, commercial litigation, taxation law, tax planning, and more for individuals, families, and businesses. Get started today.


RMP Business Law Attorney Arkansas

Disclaimer:

The information provided on this website does not constitute legal advice. Instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.


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