Will Noncompete Agreements Be Banned in America?

The Federal Trade Commission (FTC) voted 3-2 to ban nearly all noncompete clauses in employment agreements. Noncompete clauses typically prevent workers from joining competing businesses or stating a competing business.  

The FTC estimates that about 30 million Americans are bound by noncompete clauses. Workers impacted by noncompete clauses range from minimum wage workers to CEOs. Eliminating noncompete clauses is estimated to lead to nearly $300 billion in increased wages this year by encouraging people to switch jobs freely.  

The rule change is expected to take effect later this year. However, it carves out an exception for existing noncompete clauses barring senior executives from joining competing companies. The FTC rationalized that such agreements are more likely to have been negotiated.  

The U.S. Chamber of Commerce, a private lobbying organization for American businesses, stated it would FTC to block the rule change. The Chamber claims that noncompetes are vital to companies, by allowing them to better guard trade secrets, and employees, by giving employers greater incentive to invest in workforce training and development. 

What Is a Noncompete Agreement? 

A noncompete agreement is a contractual term prohibiting an employee from entering into competition with another employer in the same field. The purpose of a noncompete clause is to prevent workers from sharing proprietary information or trade secrets with the new employer that could hurt or undermine the prior employer.  

Most noncompete clauses have a time frame for when the employee is barred from working for a competitor. If a noncompete clause were indefinite, it would severely hinder an employee from finding new work. Likewise, noncompete clauses may also define the geographic location that the employee is prohibited from working in and the market they are permitted to work in.  

The validity and enforcement of a non-compete will vary depending on which state the employee is in. However, the FTC’s recent rule change may invalidate all noncompete agreements in the future.  

The Right to Contract?  

The United States Supreme Court used to recognize a right to contract between employer and employee. The high court often used the right to contract to strike down laws designed to protect employees, such as minimum wage and maximum hour laws. The Supreme Court eventually abridged the right to contract during the Great Depression in response to President Roosevelt’s threat to pack the court.  

The Chamber of Commerce justifies noncompete clauses, in part, on the basis that it gives employers greater incentive to invest in workforce training and development. However, an employer that really wants to invest in workforce training could always do so. It doesn’t need a sketchy contract clause to do so. If an employer really wants to retain employees, it needs to offer greater incentives to employees such as higher pay, health benefits, remote work options, etc. A good employer does not need to resort to contract law to keep an employee.  

Moreover, the entire premise of noncompete agreements is that they are voluntary. However, companies are purchased or merge with other companies often, like the Twitter buyout by Elon Musk. When that occurs, the new employer forces the employee to either sign a new noncompete clause to continue doing what they had been doing for a long time or find a new job.  

Instead of a blanket ban or blank free market, noncompete clauses could be selective by field. Some industries, such as the tech industry or military defense industry, require noncompete clauses to ensure that the company maintains a technological edge in a competitive field. In contrast, industries like banking or insurance don’t really need a noncompete clause because everyone in that industry does the same thing.  

Similarly, noncompete clauses make sense for employees who are exposed to trade secrets. Top executive officers or those in the research and development industry are more likely to be exposed to trade secrets. On the other hand, those in retail or human resources may be less likely to come across patented and protected information.  

Regulating noncompete clauses may be necessary to protect employees from labor abuse by employers. However, there is no need for a one-size fit approach like the FTC is taking here.  

When Do I Need to Contact a Lawyer? 

Although non-competes are legally valid, they can be restrictive regarding your career prospects. Therefore, before signing this contract, you must understand its legal implications. 

If you believe that your former employer is being unfair or too restrictive, you can contact a skilled employment contract lawyer to help you in your case. The lawyer can guide you through this process and explain to you what your legal options may be.