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Will non-compete agreements survive the new FTC rule?

One of the most common contracts between employers and employees is the non-compete agreement. An NCA is a contract between an employer and an employee in which the employee agrees not to seek nor accept employment with a competitor of the current employer. On January 5, 2023, the United States Federal Trade Commission (FTC) announced rulemaking under the Administrative Procedure Act to consider a proposed rule that would ban all non-compete agreements. Scholars, commentators, lawyers and judges are now considering if the rule will be adopted and what that will mean for employment.

The viewpoint of the FTC

The FTC is in existence to guarantee that U.S. markets are competitive. With the announcement of the potential ban of NCAs, the FTC relied on its legislative purpose to justify the rule. The Commission noted that “non-compete clauses prevent workers from leaving jobs and decrease competition for workers.” “. . . [T]hey lower wages for both workers who are subject to [non-compete agreements] as well as workers who are not.” The FTC believes that its proposed rule will ensure a competitive marketplace for valuable employees.

The rule

The proposed rule defines a “non-compete clause” as a contractual term between an employer and a worker who prevents the worker from seeking or accepting employment” with a person or operating business after the worker’s term of employment with the current employer ends. The proposed rule uses a “functional test” to determine whether a clause limits the employee’s right to seek other employment.

The effect of the rule

The FTC estimates that one in five American workers have signed an NCA. The commission estimates that the proposed rule would increase the earnings of American workers by $250 billion to $296 billion per year. The effect of the rule will also depend on any amendments that are added to the rule during the process of consideration and adoption.

Testing the rule

Litigation will be a reality to determine the implications of the proposed rule if it’s adopted. Any persons who feel they may be affected by the rule may wish to consult a knowledgeable employment law attorney for advice on the scope and effect of the rule.