The Federal Trade Commission (FTC) recently finalized a rule that significantly changes the landscape of non-compete agreements across the United States. This new regulation, which bans non-compete clauses for almost all workers, marks a pivotal shift in employment law that could have profound implications for employees and businesses alike. Here’s a detailed look at what this new rule entails, the exceptions it provides, how it compares to existing state laws like those in California, and what it might mean for employees statewide.
What Are Non-Compete Agreements?
Non-compete agreements, also known as non-compete clauses, are contracts or parts of employment contracts that restrict the ability of an employee to engage in business activities that compete with their current employer’s business. These agreements can prevent an employee from working for a competitor or starting a similar business for a certain period of time and within a specific geographic area after leaving the company.
The purpose of non-compete agreements is generally to protect a company’s sensitive information or trade secrets and to preserve its competitive advantage by limiting the risk of such information being used by competitors. These agreements are meant to prevent situations where an employee could leave a company, take what they’ve learned, and immediately start working for a rival or start a competing business.
However, non-compete agreements are controversial because they can also limit job mobility and suppress wage growth by restricting employees’ employment options after they leave a company. Previously, the enforceability of these agreements varied widely by jurisdiction, as different states have different laws regarding the balance between protecting a business’s interests and an employee’s right to work. California has long taken a stand against them, asserting that they are bad for employees and the economy as a whole.
Overview of the New FTC Rule
The FTC’s new rule effectively bans non-compete agreements for most workers nationwide, aiming to promote greater job mobility and competition, which are expected to lead to higher wages, more innovation, and increased economic growth.
Specifically, the rule prohibits employers from entering into or enforcing non-compete clauses with their employees. The clauses are defined as contractual terms that restrict employees from working in the same field or starting a similar business after leaving a company.
The rule provides a specific exception for senior executives. These are defined as employees who are in policy-making positions and meet certain compensation thresholds (over $151,164 annually). For these individuals, existing non-compete agreements can remain in force nationally as long as the local jurisdiction permits them.
Implementation and Enforcement
The rule will take effect 120 days after its publication in the Federal Register. From that point on, non-compete clauses for the vast majority of workers will be considered unenforceable. Employers will need to notify workers who are currently under non-compete agreements that these will no longer be enforced, except for those few applicable to senior executives.
Economic and Innovation Boost
The FTC estimates significant economic benefits from the new rule, including the creation of over 8,500 new businesses annually and an increase in worker earnings by $400-$488 billion over the next decade. Additionally, innovation is expected to surge, with an anticipated 17,000 to 29,000 more patents filed annually as a result of increased mobility and the sharing of ideas.
Comparison with California State Law
The new nationwide ban on non-compete agreements announced by the FTC will largely reinforce the existing legal framework in California, where non-compete agreements have already been prohibited for all workers under California Business and Professions Code 16600. This long-standing state law means that the new FTC rule will not significantly alter the legal landscape for most workers in California.
However, the FTC rule differs slightly in that it allows non-compete clauses for a narrow group of senior executives under specific conditions, which is more permissive than California’s outright ban. This means that for this small subset of employees, the FTC’s rule could potentially introduce a new element into the employment negotiations and contract terms. However, given California’s stringent existing laws and their broad application, the practical impact might be minimal.
Overall, California workers will continue to enjoy freedom from non-compete restrictions, just as they have for years, and the new FTC rule will primarily serve to extend similar protections to workers in states that did not have such prohibitive measures in place before. This alignment could simplify compliance for businesses that operate both in California and other states, as they now face a more uniform regulatory environment across the country.
Implications for Businesses
The prohibition on non-compete agreements is expected to foster a more dynamic and competitive marketplace. For businesses, this means adjusting to a reality where retaining top talent may depend more heavily on factors like workplace culture, advancement opportunities, and compensation rather than relying on legal constraints on employees’ mobility.
Businesses will also need to be mindful of the transition period as the rule takes effect. According to the FTC, all existing non-compete agreements (except those applicable to certain senior executives) will become unenforceable once the rule is implemented. This will require significant adjustments to current human resources policies and contract management practices.
Fighting Back Against Non-Competes in California
The FTC’s decision to ban non-compete agreements nationwide (with limited exceptions for senior executives) represents a major shift in U.S. labor policy. This change is poised to increase competition not just for employees but also among businesses, which will likely lead to a more vibrant and innovative market.
As a California employee, the biggest thing to take away from the FTC’s new rule is that non-competes are less enforceable than ever. If a past or current employer is threatening legal action based on a non-compete clause in your contract, there is an excellent chance that they are violating your rights under state and (soon) federal law. If so, you deserve the best legal help available to hold them accountable. The professional employment law attorneys at the Law Offices of Todd M. Friedman, P.C., can help. Schedule your consultation today to learn how we can assist you with overly restrictive employment contracts in California.
