On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule that, if adopted, would result in a near-total nationwide ban on the use of non-compete agreements. If enacted as presently drafted, the FTC’s proposed rule would preempt current state laws on non-compete agreements and further require employers to rescind all existing non-compete provisions within 180 days of the publication of the final rule.
The FTC’s proposed rule prohibits employers from requiring non-compete agreements from workers, with limited exceptions, based on the FTC’s initial finding that non-compete agreements constitute an unfair method of competition. The present actions of this agency are quite controversial because, historically, the FTC has never attempted to regulate non-compete agreements between employers and employees as this issue has been left for the states to address themselves.
While the proposed rule does not explicitly prohibit other forms of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements, it cautions that those alternative restrictions can be so broadly drafted to have the same effect as a non-compete and can in essence be a de facto non-compete agreement. 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, no matter what it may be labelled by the employer.
The FTC is presently accepting public comments on the proposed rule through March 10, 2023. Certain businesses, trade groups, and factions of Congress have already expressed their opposition to the proposed rule and its broad impact. In addition, there will in all likelihood be lawsuits filed challenging the FTC’s authority to ban non-compete agreements. Thus, all need to stay tuned to see what happens with the FTC’s rule and whether it will ever in fact go into effect.
It is also worth noting that the FTC’s actions come on the heels of similar measures that have been passed by various states that have already placed limits on when non-competes are available from employees and are enforceable.
New Jersey is now attempting to join that ever expanding group of states that are imposing restrictions on non-compete agreements. Assembly Bill A3715 would impose stringent requirements on New Jersey employers seeking to restrict their employee’s post termination activities, limit the permissible scope and enforceability of certain restrictive covenants, and increase the cost of enforcing the terms of the covenants by requiring full pay and benefits to the ex-employee during the term of the restrictive covenant.
The proposed bill would, inter alia, limit the term of a restrictive covenant to 12 months, limit the geographic boundaries to the employer’s “material presence,” require notice of the restrictive covenant within 30 days of the start of employment, mandate that the employer provide notice within 10 days of termination that the employer intends to enforce the restrictive covenant, and provide full pay and fringe benefits to the employee while the covenant is being enforced. There is also a blanket prohibition on restrictive covenants for certain classes of employees, including all nonexempt employees under the FLSA, low wage employees and employees who are laid off or terminated for reasons other than misconduct. Finally, the bill would end “no poach” agreements—those agreements between competitors not to solicit employees from one another. The FTC (along with issuing the above discussed rule) has also begun bringing litigation against companies that utilize such anti-poaching restrictions to prevent enforcement of such restrictive provisions.
The current status of A3715 remains in limbo. It was voted out of the Assembly Labor Committee on May 19, 2022. Like the proposed FTC rule, there has been significant criticism of the proposed bill from employer groups and other lobbying organizations. Given New Jersey’s current administration in Trenton, and how it has traditionally been a very pro employee state, one can expect that it is only a matter of time before New Jersey joins the increasing list of states limiting non-compete agreements, whether through this bill or some alternative version.
As with all significant possible legal changes, we will continue to monitor these matters, and keep everyone abreast of any additional developments.
