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August 21, 2023 Expert’s Corner

Federal, state gov’ts put noncompete agreements in regulatory crosshairs

Salvatore G. Gangemi
By Salvatore G. Gangemi

Perhaps the biggest development in employment law in 2023 is the federal government’s proposal to ban noncompete clauses.

The federal government’s actions coincide with, or in some instances have prompted some states to restrict or outright ban noncompete agreements in their entirety.

Regardless of the outcome of the federal government’s ban, or state actions, employers can expect increased scrutiny of noncompete agreements in individual situations to ensure they are necessary to protect a legitimate protectable interest, and are otherwise reasonable.

Information technology, health care, financial services, and recruiting and placement are among the industries that rely on noncompetes, and would be the most impacted by laws or rules forbidding or restricting their use.

In January 2023, the Federal Trade Commission issued a proposed rule that bans noncompete agreements in most circumstances, on the grounds they constitute unfair competition, and therefore violate the Federal Trade Commission Act.

The FTC published its proposed rule and gave the public the opportunity to submit comments. The proposed rule and comments will form the basis of the final rule. The comments period, which ended on April 19, 2023, resulted in 27,000 public comments.

Although not yet in its final form, the proposed rule bans employers from:

  • Requiring employees or workers (including, independent contractors) to enter into a noncompete clause;
  • Keeping a pre-existing noncompete clause in force;
  • Representing to a worker that the employee is bound by a noncompete clause.

The FTC’s proposed rule defines a noncompete clause as “a contractual term between an employer and a worker 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.”

A noncompete clause called by another name — that effectively prevents a worker from seeking or accepting employment elsewhere — would also be prohibited.

Business vs. labor

Democrats support the proposed rule, as do certain labor and advocacy groups.

Not surprisingly, the U.S. Chamber of Commerce opposes the proposal on behalf of industry groups, and argues that the FTC does not have the legal authority to issue such a broad sweeping rule that effectively eliminates noncompetes, which have traditionally been governed by state law.

In other words, opponents state that the FTC’s action goes beyond its statutory authority, or violates the Constitution.

In addition to the FTC’s actions, the general counsel for the National Labor Relations Board (NLRB) released a memo on May 30, 2023, stating that most noncompetes are illegal, because they interfere with employees’ “concerted activity” to secure better working conditions by resigning, or making a plausible threat to resign.

According to the NLRB, noncompetes discourage such concerted activity, because employees are less likely to act if their work options are restricted. Although the NLRB’s actions apply to both union and non-union workforces, its emphasis on non-union employment tends to be significantly less during a Republican presidential administration.

State restrictions

Regardless of federal efforts to ban or restrict noncompetes, the clear trend disfavors their use, and states are engaging in their own efforts to address the issue.

In June, the New York legislature passed a bill banning noncompete agreements that is significantly broader than California’s, and provides very few exemptions.

For instance, New York’s bill does not expressly state that noncompetes are permitted in the context of the sale of a business. Whether the bill will become law remains to be seen — it still requires sign off from the governor. It is likely that the final law will be narrower than the current bill.

Likewise, the Connecticut legislature amended the state’s physician noncompete law and added protections for nurse practitioners and physician assistants, which will take effect on Oct. 1, 2023.

Further attempts this year to restrict noncompete agreements in Connecticut didn’t pass. One proposal restricted noncompetes by imposing a one-year maximum duration. It also prohibited noncompete agreements for wage workers covered by overtime and minimum wage requirements under state and federal law.

While the federal government moves forward with its proposals, and states consider bans and restrictions on noncompetes, businesses should act now to determine whether their existing noncompete agreements are actually necessary, and possibly consider other less restrictive options for protecting their legitimate interests, like confidential information and trade secrets.

For instance, businesses may find that nondisclosure of confidential information agreements are more than enough to protect their concerns. Other options might include garden leave clauses, which require employers to keep a terminated employee on payroll for a period that coincides with their noncompete period.

In any event, even without legislation banning or restricting noncompetes, courts will be even more willing to restrict overbroad protections that impact an employee’s attempt to work in their chosen profession.

Salvatore G. Gangemi is a partner at law firm Murtha Cullina.

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