The Federal Trade Commission is about to outlaw non-compete agreements. What does that mean for your North Carolina business?
On January 5th of this year, the Federal Trade Commission proposed a new rule that, if enacted, would amount to a near ban of existing and future noncompete agreements, not just at the federal level, but it would supersede all existing and non-compliant state laws.
What is a non-compete?
We’ve talked about non-compete agreements before. Basically, it’s an agreement for employers and employees. It says an employee, for a specified time period after ending their time with the employer, will not work for any any of the employer’s competitors within a time period, a geographical limitation and a type of business limitation. That means employers can’t say you can’t work for anybody for the next five years. They can, however, say you cannot work for a business exactly like mine within 100 mile radius for the next two years. A lot of those laws are state by state. Certain states say it’s two years, certain states say it’s five years. Certain states say it’s a 50 mile limitation. Certain states say it’s dependent on the business type. But in general, non-compete agreements basically say it allows an employer to limit what an employee can do after they’re terminated from that employer or they leave that employer.
The federal Trade Commission is moving in the direction of banning all non-compete agreements.
The idea is that non-compete agreements are an infringement on a worker’s rights and basically no longer serve anybody and don’t serve business. This is a growing trend that the federal government has been moving in this direction for a while, though this is a drastic departure and shows that the focus these days is on the worker. However, it takes away some of the traditional protections that employers have been used to. Protections that I myself have advocated to my clients over the years.
So what happens if the FTC’s new rule passes?
Basically, it declares non-compete as an unfair method of competition for an employer to enter into or attempts to enter into a non-compete non-compete agreement with a worker. It’s an unfair method of competition to maintain a worker with a non-compete clause. It’s an unfair method of competition to represent to a worker that the worker is subject to a non-compete clause. Basically, it says you just can’t use them anymore. I know lots of employers have used these as a sort of tactic or a shot across the bow over the years with no intention of ever enforcing them, saying “We just want to make sure that you’re not going to do this.” You can’t do that anymore. Not only can you are they not enforceable after the passage of this rule, but you can’t even propose them as a possibility. The FTC doesn’t just go as far as the employee.
There’s a difference between employees and independent contractors.
These are legally different categories of workers. Well, for this rule, the Federal Trade Commission has written worker to include pretty much everybody from high level executives to independent contractors. So employers are going to lose their ability to enter into non-compete agreements with traditional employees, but also executives, independent contractors, interns, volunteers, pretty much anybody. It goes even further in that it will be retroactive. So if the rule passes, any non-compete agreement moving forward is subject to it. But also any non-compete agreement that exists at that time has to be rescinded and is no longer enforceable. And not only does it have to be rescinded, but it has to be the employer has to go in and individually notify every employee or worker that they have a non-compete agreement with an email or text or some sort of formal memorialized communication. How the rulemaking process works is that the proposed rule is open to comment until March 20th. After that, it’s got a couple other procedural hurdles to go through.
It’s likely that it this bill will be be amended.
It’s possible that it won’t even pass. But if it does, The burden on employers to comply is significant compared to other similar rules that have passed in recent years. And in addition to that, takes away a very long-standing traditional tool that employers have used to protect their intellectual property, protect their client database, protect their way of doing business. So be on the lookout for that change coming very quickly which would directly affect every North Carolina business that’s been using non-compete agreements.
