On January 5, 2023, the U.S. Federal Trade Commission (FTC) announced a proposed rule that, if enacted, would amount to an almost complete nationwide ban on the use of non-compete agreements. If enacted as written, the FTC’s proposed rule would replace existing state noncompete agreement laws and would require employers to rescind all existing noncompete clauses within 180 days of the final rule’s publication.
What is a non-compete agreement and how is it enforced?
A non-compete agreement is a contractual clause that prohibits an employee from competing with an employer after the employment period ends. These agreements are generally governed by state law. While most states have passed statutes that impose some restrictions on non-compete agreements, these restrictions vary widely. For example, three states—California, North Dakota, and Oklahoma—have banned non-compete agreements, with a few exceptions. Other states, including Maine and New Hampshire, ban noncompete agreements unless workers earn more than a certain threshold.
In Massachusetts, non-compete agreements entered into on or after October 1, 2018 are governed by statute. With few exceptions, the non-compete period cannot exceed one year. Additionally, employers must compensate future and current employees for signing non-compete agreements. Specifically, employers must offer prospective employees “time off” (defined as 50% of the employee’s maximum annual salary for the past two years) or “other mutually agreed consideration” to enter into a non-compete agreement. Finally, employers must comply with procedural hurdles for non-compete enforcement, including providing notice of rights to attorneys at least ten days in advance of the effective date. These restrictions have generally resulted in Massachusetts businesses reducing the use of non-compete agreements as a routine practice.
Proposed FTC Non-Compete Agreement
The FTC’s proposed rule prohibits employers from imposing non-compete agreements on workers with limited exceptions, based on the FTC’s preliminary findings that non-compete agreements constitute an unfair method of competition. The news caused a stir in the business world because, historically, the FTC has not attempted to regulate noncompete agreements between employers and employees.
While the proposed rule does not expressly prohibit other forms of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements, it recognizes that such clauses could be drafted broadly to have the same effect as a non-compete and could function functionally as a de facto Non-compete agreement. Accordingly, the proposed rule prohibits the use of any form of agreement that has the effect of prohibiting a worker from seeking or accepting a new job.
move forward
The FTC is accepting public comments on the proposed rule through March 10, 2023. Certain businesses, trade groups and factions in Congress have already voiced opposition to the proposed rule and its broad scope. Therefore, the final form of the rules will likely not be as broad. Moreover, the lawsuit will undoubtedly challenge the FTC’s authority to ban non-compete agreements — something long left to the states.
Against this backdrop, there are a number of proactive steps Massachusetts companies can take to protect the integrity of their existing agreements. First, verify that any current non-compete agreements comply with state law. Second, consult with an attorney to strategize how to use other contractual tools (such as non-solicitation and non-disclosure clauses) to protect their interests when the FTC rules are issued.
Since non-compete agreements are already heavily regulated in Massachusetts, the enactment of the FTC’s proposed rule likely won’t have a huge federal impact. However, the rule will affect millions of workers across the country and will revolutionize employment policy across the country.