During this webinar, McDermott Partners Rachel B. Cowen and Justin P. Murphy reviewed what employers should know about the proposed rule recently issued by the Federal Trade Commission (FTC) that would prohibit employers from using noncompete agreements with their employees or independent contractors.
Below are key takeaways from the discussion.
On January 5, 2023, the FTC issued a proposed rule that, if adopted, would make it illegal for employers to enter into noncompete agreements with their employees or independent contractors, maintain a noncompete with an employee or represent to an employee that the worker is subject to a noncompete. The proposed rule permits the use of confidentiality agreements, but it states that other agreements (e.g., nonsolicitation clauses) will be permitted only if they do not operate as a de facto noncompete. The proposed rule further states that noncompetes will only be permitted in connection with the sale of a business for those who own at least 25% of the business.
We anticipate it will take at least six months before any final rule is adopted, followed by a 180-day delay in enforcement. When the final proposed rule goes into effect, there will likely be immediate legal challenges accompanied by a request for injunctive relief to stay the rule.
In the meantime, the FTC is seeking public comments on the proposed rule by March 20, 2023. This is an opportunity to make a factual record and present specific and unique data and information relating to the importance and benefits of noncompete agreements from clients, industries and experiences. Some areas of focus for potential comment will be:
- How does your company use noncompetes with its workers?
- Are some or all employees subject to them, and if only some, what level and why?
- Are you using these provisions in forfeiture clauses tied to equity grants or long-term incentive plan (LTIP) bonus programs?
- How will the elimination of such agreements injure competition or other legitimate interests (e.g., the protection of trade secrets and intellectual property)?
- Who within your organization is actually required to sign these agreements (e.g., only highly compensated executives or rank-and-file employees)?
- For the sale of a business, is the threshold of 25%, which also applies to partnerships and small businesses, too high, such that it will actually reduce the ability of small business owners to sell their business?
- The comment period may afford employers the opportunity to seek further clarity on when such agreements are permitted, including parameters on the scope and duration of such limitations.
- Do these lesser restrictions result in less employee mobility or have you seen employees move freely?
- Also offering similar information to the items above.
- Other forfeiture clauses wholly unrelated to noncompetes
- The FTC’s proposed rule also references forfeiture clauses, such as the repayment of tool loans, as operating as a de facto noncompete because they inhibit employee mobility. This brings into play repayment of relocation packages, tuition assistance or other reimbursements typically applied to individuals who fail to remain with the company for at least one year.
- Here, too, employers should consider providing factual data regarding the cost of recruiting or investing in employees and why it’s reasonable to expect an employee who takes such money could be expected to stay for a brief period. Otherwise, employers could be faced with a situation where the employee accepts perks in bad faith knowing they intend to leave for another employer who wouldn’t reimburse the same.
In addition to submitting comments, employers should take the opportunity to review and ensure that their existing covenants are narrowly tailored to comply with the states in which they operate. This is key as we see the growing trend to:
- Limit pure noncompete agreements to only highly compensated individuals;
- Require the employer to pay compensation during the noncompete period;
- Tighten the rules on when nonsolicits are reasonable in the time, scope and geography; and
- Refuse to blue pencil overbroad agreements where the employer made little or no good faith effort to narrowly tailor the same.