Last week, the U.S. Federal Trade Commission (FTC) announced a final rule imposing a near-universal ban on noncompetes once it becomes effective later this year. Last year, the FTC’s publication of a notice of proposed rulemaking (NPRM) to ban the use of noncompete provisions and agreements between employers and workers raised alarm bells among independent insurance agents.
Independent agency owners are among millions of businesses that rely on noncompetes to protect their livelihoods. PIA’s comments to the FTC sought to alert it to the damage such a ban would have on businesses, particularly independent insurance agencies. PIA asked the FTC to withdraw its proposal in favor of a more tailored regulation that would address alleged corporate overuse of such documents without impeding the work independent agents do every day.
Timing
The ban will become effective 120 days after it is published in the Federal Register, which is expected to occur shortly, though it has not been published as of this posting. Additionally, the final rule is expected to generate substantial litigation, and those lawsuits are likely to prompt a temporary “stay,” or postponement of its effective date, until the litigation process ends. A delay will give businesses more time to prepare for the change, and, of course, if a court decides that the rule is invalid, the FTC would likely withdraw it altogether.
Scope
Once effective, the final rule will prohibit businesses from entering into noncompete agreements or including noncompete clauses in agreements they enter into with their workers. The rule also bans other arrangements if they function as noncompetes, even if they are not characterized as such. The rule renders unenforceable clauses or agreements that “function[s] to prevent a worker” from looking for or accepting work that would be in competition with the worker’s employer or from operating a business that would compete with the worker’s employer.
Additionally, businesses are now prohibited from entering into or trying to enter into noncompetes, enforcing or trying to enforce noncompetes against workers (limited to noncompetes entered into on or after the effective date of the ban for senior executives, meaning that the ban is retroactive—i.e., it nullifies existing noncompetes—for workers who are not senior executives). The rule also requires businesses to notify affected workers in existing noncompetes that such arrangements are no longer enforceable.
While nondisclosure and nonsolicitation clauses/agreements should remain legally enforceable, if a nondisclosure or nonsolicitation clause/agreement has the same effect on a worker as a noncompete, a court could use this ban to conclude that a nondisclosure or nonsolicitation clause/agreement is also unenforceable.
Definitions
The impact of the ban on businesses could turn on how terms like “non-compete clause” and “worker” are defined in the final rule and interpreted by courts. Here is how those terms are defined in the final rule:
A non-compete clause is a term or condition of employment, either written or oral, that prevents a worker from, punishes a worker for, or effectively prevents a worker from:
- looking for or accepting work with a different person, where that work would start after the end of the work that includes the term or condition; OR
- operating a business after the end of the employment connected to the term or condition.
A worker is someone who works or previously worked, whether the work was paid or unpaid, and regardless of the worker’s title or legal status. The term “worker” includes but is not limited to an employee, independent contractor, extern, intern, volunteer, or apprentice.
Conclusion
PIA members use noncompetes to protect their businesses, and we intend to continue to work with the FTC and the administration to alleviate its concerns while protecting the rights of businesses and workers to use noncompetes.