Nearly one-in-five Americans are bound by a non-compete agreement. A non-compete agreement is an agreement between an employee and employer that “prohibits the employee from competing with the business directly or indirectly for a specific duration of time after their employment has ended.” These agreements are typically signed prior to an employee starting their position with the company and are often presented as a condition of employment.
Companies say non-compete agreements are a critical way to promote competition and protect their trade secrets. Conversely, worker advocates say, “the agreements suppress wages and make workers less mobile.” In January, the U.S. Federal Trade Commission (“FTC”), proposed a rule that would put an end to companies requiring employees to sign a non-compete agreement as a condition of employment. This proposal is currently pending before the FTC.
The FTC was expected to provide a decision this year; however, they received nearly 27,000 comments from the public on the proposed rule. Thus, the FTC is now expected to vote in April 2024 for a final rule. If passed, all states across the U.S. would be affected, the rule will preempt any state law that conflicts with the rule. Keep in mind, the proposed rule does not outright ban all non-compete agreements. Instead, a “functional test” to determine whether the agreement prohibits an employer from changing employment or operating their own business will be applied.
Additionally, the proposed rule would not only affect future non-competes, but also potentially rescind, or invalidate, current non-competes. The proposed rule would apply to anyone hired to perform work, including employees, independent contractors, interns, and even volunteers.
Recently, General Counsel for the National Labor Relations Board (NLRB), Jennifer Abruzzo authored a memo stating she believes non-compete agreements violate U.S. Labor Laws. General Counsel Abruzzo, who was appointed by President Joe Biden, “acts as a prosecutor and brings unfair labor practice cases to the separate five-member board.” Her concern stems from the belief that non-compete agreements stop employees from exercising their rights under Section 7 of the National Labor Relations Act. Specifically, General Counsel Abruzzo believes non-compete agreements interfere with an employee’s ability to resign or threaten to resign to secure better working conditions; seek or accept employment with a local competitor to obtain better working conditions; solicit their co-workers to do the same; and to engage in protected activities such as union organizing at an employer’s workplace.
This aligns with the concerns raised by many – that is, non-competes are becoming too commonplace, affecting positions requiring little to no education or training, and creating unnecessary barriers to employment.
As General Counsel Abruzzo also recognizes, a complete eradication of non-competes is not likely to be well-received. Thus, there should be exceptions to a bright-line prohibition on non-compete agreements. For example, employers should be able to impose restrictions on competition on individuals having a managerial and ownership interest in the company or in agreements with true independent contractors.
If you are an employer or employee, it is crucial to consult with an experienced attorney to determine if your non-compete agreement is enforceable. Our attorneys at OVB Law & Consulting S.C. have years of experience helping clients review and draft non-compete agreements. Call our office today at (414) 585-0588 to schedule an appointment.
*1. https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemakin
*2. https://www.nlrb.gov/guidance/memos-research/general-counsel-memos, GC 23-08
