On January 5, the Federal Trade Commission (the “FTC”) published a proposed rule that would—if it becomes effective—ban the use of noncompete agreements between employers and their workers.
A noncompete agreement is a binding contract that prevents workers from seeking employment with a competitor or starting their own competitive business. Under preexisting Ohio law, noncompete agreements are lawful and enforceable so long as they are reasonable in scope, which typically means they are limited in terms of: (1) time (often expiring within one to two years after the employee’s employment); and (2) geography (often applying only where the employer actually conducts business).
However, the Federal Trade Commission intends to ban noncompete agreements altogether. The major provisions of the agency’s proposed rule can be summarized as follows:
- Under the proposed rule, it would be unlawful for an employer to enter into—or attempt to enter into—a noncompete with an employee or an independent contractor;
- Employers would be required to rescind any existing noncompete agreements and inform their workers that prior agreements no longer apply; and
- Employers would be prevented from even suggesting that a worker is bound by a noncompete agreement.
The FTC’s proposed rule would have a major impact on the U.S. economy. Aside from the fact that it would supersede existing state laws regarding the enforceability of noncompete agreements, it would also directly impact millions of workers. According to the FTC, approximately 30 million workers are currently bound by noncompete provisions.
This rule does not go into effect immediately. Instead, the public is provided a 60-day period to submit comments regarding the proposed rule. Thereafter, the FTC will publish a finalized rule, which would become effective 180 days after its publication. The FTC’s proposal will generate a large number of public comments, and if finalized, will likely face legal challenges regarding its legal validity.
Proponents of the rule point out that noncompete agreements are the product of unequal bargaining power between employers and employees and can be harmful to U.S. workers. As the FTC put it: “[b]ecause non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not.” Opponents, on the other hand, argue that the FTC’s proposed rule exemplifies governmental overreach, that it undermines employers’ and workers’ rights to freely enter contracts, and that it needlessly eliminates existing state laws regarding noncompete clauses.
For now, the FTC’s proposal is just that—a proposal that is not yet legally effective. It is therefore important to note that, at least for the time being, employers and their workers remain bound by existing noncompete agreements.
For more information or to seek counsel from our employment law group, please reach out to request a consultation or call us at 216-696-1422.
