Proposed Rule to Ban Non-Compete Clauses
A non-competition agreement (or “non-compete” agreement) is a contract between an employee and its employer which prohibits the contracting employee from competing with the employer (either directly or indirectly) once the employee-employer relationship comes to an end. As a general rule, non-compete agreements specify a certain amount of time and geographic limitations. Some agreements may attempt to prohibit the employee from working for a competitor company, opening a new competing business, start developing new competing products and services, among other matters. It is important for you, as an employee, to know your rights and obligations before you accept an offer and enter in a non-compete agreement with your current or future employer.
Legality and Enforceability of Non-Compete Agreements
All states have different approaches in regards to the legality and enforceability of these type of agreements. In New York, these agreements are only allowed and enforceable to the extent they (1) are necessary to protect the contracting employer’s legitimate interest; (2) do not impose an undue hardship on the contracting employee; (3) do not harm the public; and (4) are reasonable in time period and geographic scope. Protecting trade secrets and confidential information are considered legitimate business interests of an employer. In addition, employers usually want to prevent employees from taking their specialized skills and knowledge gained during their employment to a competitor company. In order to determine whether a non-compete agreement is enforceable; courts will consider a contacting employee’s job duties and the employer’s business interest.
Agreeing to Non-Compete Agreements (or Clauses within an Employment Agreement)
You may be required to sign a non-compete agreement before you start working for your employer or even after. However, you should be aware that in New York there is no law that requires you to sign one. As such, you should always seek legal advice before entering in such a contractual agreement and negotiate its terms, either directly or through your counsel, with your future or current employer. Before signing a non-compete agreement you may want to think about: what type of businesses would be considered competitors under the agreement, how long would the non-compete period be and what geographic area would you be limited in working should you decide to part ways and leave your employer, etc.
If the relationship with your previous employer has ended and you are considering a new job, make sure to review your non-compete agreement and seek legal advice if you are unsure of your obligations.
Federal Trade Commission Ban
On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing non-competes on employees, which the agency considers to be an exploitative practice that “suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” In addition, “[b]y stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans” (available at Federal Trade Commission, (last visited May 3, 2023)).
From a practical point of view, corporations apply non-compete clauses to employees across a variety of industries and job levels (e.g., from hairstylists and warehouse worker to professionals such as doctors and executives). As stated on the FTC’s Press Release:
The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways – from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies. This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices – as seen in the health care sector.
The FTC’s proposed rule would generally prohibit an employer from: (1) entering into or attempting to enter into a non-compete with a worker; (2) maintaining a non-compete with a worker; or (3) representing to a worker, under certain circumstances, that the worker is subject to a non-compete. This proposed rule would also apply to independent contractors and anyone working for an employer, whether paid or unpaid. In addition, employers would need to rescind existing non-compete agreements and inform their employees that such agreements and/or clauses are no longer in effect.
The FTC sought public comments until April 19, 2023. We will keep our readers informed on the FTC’s decision once released.
Please note that this blog should be read for informational purposes only. If you have any questions or require additional information, please contact our office.
Thank you for reading our blogs!