Summary: On January 5, 2023 the Federal Trade Commission has published a proposed rule that would ban employers from forcing their employees to sign non-compete agreements. While, this is still only a proposed rule, it signals a growing concern over the harmful effects that non-competes have on the American workforce.
On January 5, 2023, the Federal Trade Commission has published a proposed regulation that would in essence bring non-competes to an end. Under this new law an employer would be prohibited from entering into an agreement with its workers “that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Specifically, this proposed law would prohibit employers from entering or even attempting to enter into non-compete agreements, maintaining a non-compete agreement, or representing to a worker that they are subject to a non-compete agreement unless it has a good faith basis to do so. Of pinnacle importance is the fact that this proposed law has a retroactive effect that would mandate that employers rescind any non-competes it may have with its work force within a certain period of time.
Moreover, in order to ensure that an employer would not be able to bypass this new law by simply pigeonholing a non-compete into another provision of their agreement, the FTC has proposed the adoption of a “functional test.” In essence this test would measure whether the provision would prevent a worker from seeking employment elsewhere after they leave their current employer. The proposed law outlined two examples in which this may occur. First, a non-disclosure agreement that is drafted in such a way that it would preclude a worker from seeking employment in the same field, Second, a contractual term in which a worker is required to pay for training costs if the worker’s employment is terminated before a specific period of time.
Lastly, this proposed law would preempt any state laws, unless they give greater protections against non-compete clauses. This means that states such as Texas, which allow non-competes, would be unable to continue with the practice.
In short, this is a fantastic step in the right direction. It is estimated that roughly one in five American workers are subject to a non-compete. This is despite the fact that some states like California have long banned their implementation. Additionally, the FTC has estimated that passing this proposed law would increase wages by nearly $300 billion dollars a year and expand the career opportunities for about 30 million Americans.
As an attorney that has defended many employees from alleged breaches of non-competes this is a welcomes sight. Often times, non-competes are in place merely to stifle the mobility of the workers. In Texas, these provisions are often times written in an overbroad manner that basically freezes workers out of particular industry. While these sorts of clauses are not allowed under the Texas Business Code, since Texas law mandates that court shall rewrite the agreements for the employers if they are deemed invalid, employers have little incentive to crafting narrowly tailored non-competes. Moreover, since the threat of litigation and forcing a worker to pay thousands of dollars in legal fees to defend a case is always present, it could be a situation that the employer can have their way without winning in court.
At the moment though, it is far too early to celebrate this development. The FTC has merely proposed this rule, and it has opened a 60-day period where it seeks public comments on this proposed rule. Already many businesses have begun flooding the FTC with their disdain over this proposed rule, and a full-fledged effort to crush it have started. This is not even taking into consideration the legal challenges that will occur if this proposed rule passes.
There are many times where on is able to express and have their voices heard like with voting. Here, we are presented with another such example. In order to keep striding towards a more equitable workplace, these types of protection are invaluable. That is why I believe that is important to have your voices heard and comment in favor of this proposed law. This can be done online at https://www.regulations.gov/docket/FTC-2023-0007/document.
Finally, at this moment, non-competes in Texas are still valid and enforceable. If you have any questions as to what your non-compete means, it is important to contact an attorney that specializes in employment law. Here, at Wiley Walsh, P.C. we specialize in labor and employment law. Feel free to contact us for a consultation.