On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule that, if enacted, would amount to a near-total ban on the use of non-compete agreements nationwide. If enacted as written, the FTC’s proposed rule would preempt current state laws on non-compete agreements and would require employers to rescind all existing non-compete provisions within 180 days of the publication of the final rule.
What are Non-Compete Agreements and How Are They Enforced?
Non-compete agreements are contract provisions prohibiting an employee from competing with an employer after the employment period is over. These agreements are generally governed by state law. While most states have passed statutes that impose some restrictions on non-compete agreements, those limitations vary widely. For example, three states – California, North Dakota, and Oklahoma – have banned non-compete agreements with narrow exceptions. Other states, including Maine and New Hampshire, prohibit non-compete agreements unless the worker earns above a certain threshold.
In Massachusetts, non-competition agreements entered into on or after October 1, 2018 are regulated by statute. With limited exceptions, the non-compete period cannot exceed one year. In addition, employers are required to compensate prospective and current employees for their signing of a non-compete agreement. In particular, an employer is required to provide either “garden leave” (defined as 50% of the employee’s highest paid yearly wages over the past two years) or “other mutually agreed upon consideration” to a prospective employee for signing a non-compete agreement. Finally, employers must comply with procedural hurdles for non-competes to be enforceable, including providing notice of the right to counsel and providing at least ten days’ notice before the effective date. These restrictions have generally caused Massachusetts businesses to curtail the use of non-compete agreements as a regular practice.
The Proposed FTC Ban on Non-Compete Agreements
The FTC’s proposed rule prohibits employers from imposing non-compete agreements on workers with limited exceptions, based on the FTC’s initial finding that non-compete agreements constitute an unfair method of competition. The news is making waves in the business community because historically, the FTC has not attempted to regulate non-compete agreements between employers and employees.
While the proposed rule does not explicitly prohibit other forms of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements, it recognizes that those clauses can be broadly drafted to have the same effect as a non-compete and can functionally serve as de facto non-compete agreements. As such, the proposed rule prohibits the use of any form of agreement that has the effect of prohibiting workers from seeking or accepting new employment.
Moving Forward
The FTC is accepting public comments on the proposed rule through March 10, 2023. Certain businesses, trade groups, and factions of Congress have already voiced opposition to the proposed rule and its broad scope. As a result, it is likely that the final form of the rule will not be as broad. In addition, undoubtedly lawsuits will challenge the FTC’s authority to ban non-compete agreements – which has long been left to individual states.
Against this backdrop, Massachusetts companies can take some affirmative steps to protect the integrity of their existing agreements. First, confirm that any current non-compete agreements are compliant with state law. Second, consult with counsel to strategize about how to use other contractual tools (e.g., non-solicitation and non-disclosure provisions) to protect their interests in the event the FTC rule is published.
Because non-compete agreements are already heavily regulated in Massachusetts, the enactment of the FTC proposed rule would likely not have a monumental impact in the Commonwealth. However, the rule would impact millions of workers across the country and would be a sea change in employment policy on a national scale.
