Noncompete agreements have been a source of tension for employees and employers for many years.

Employers believe these agreements help to protect their intellectual property and prevent competitors from gaining an edge. They also help protect investments employers have made in their people and limit a former employee’s ability to use the knowledge or strategy gained from the employer for the competitive advantage of another company.

Many employees may agree to sign such an agreement to land a coveted job or consider it a check-the-box exercise that won’t be enforced. Some may later regret signing such agreements if they feel doing so limits their employment opportunities elsewhere.

Now the federal government, through the Federal Trade Commission, has weighed in — and it is 100% on “team employee.”

Opportunities versus competition. The impact of noncompete clauses may be broader than many believe. About one in five employees in the US — or about 30 million people — are subject to noncompete agreements, according to the FTC. Taken across every industry and job, this is a huge number.

When Lina Khan became chair of the FTC in 2021, she said her primary goal was to “shape the distribution of power and opportunity across our economy.” In January 2023, she took a bold step in that direction by proposing a rule that would entirely ban noncompete agreements that prohibit employees from working for competitors, with no limit based on specific industries or compensation levels. The rule would also be retroactive, meaning that employees under noncompete agreements would no longer be bound by them. Once enacted, the regulations would supersede any contrary state laws.

The FTC, Khan asserts, has jurisdiction because noncompetes are anti-labor and anti-competition. The FTC claims the ban could increase wages by more than $250 billion a year.

The commission has invited the public to comment on the rule — which has President Joe Biden’s support — until April 19, after which a recommendation would be announced. Hopefully, at a minimum, the final rule will be limited to certain employees and exclude executives, highly compensated employees or those with access to highly sensitive and confidential information. And regardless of the scope of the final rule, there is likely to be litigation to stay the rule pending resolution of legal challenges.

Anticipated impact. Given the variability of existing and proposed state laws and the prospect of this pending FTC ruling being enacted in some form, now is a good opportunity to review your post-employment restrictions to determine how to best protect your company’s interests, especially during a volatile employment market. Companies should consider what is needed to protect their legitimate interests while also being mindful of attracting the best talent by being considered a reasonable and fair employer.

Some things to consider:

  • Is it necessary to restrict employees from working for competitors, or would restricting them from doing business with specific clients or customers suffice?
  • If a noncompete agreement is necessary, could it be limited to certain positions or levels, such as sales and business development staff, VPs and above?
  • How will you handle choice of law issues — e.g., the state law that would apply? For instance, given the level of employee mobility these days, companies might do a carve-out limited to employees who physically live or work in specific states.
  • How often will you review your post-employment restrictions as your business — and your competition — changes and expands? What practices will you put in place to review as employees are promoted or have a change in position or duties?

Employers have a right to protect their business interests.

Employees have a right to make a good living and advance their careers. Unfortunately, these two rights may sometimes appear to be in conflict. Time will tell where the pendulum swings in terms of which side has the upper hand. Regardless, it’s always a good idea to ensure not only legal compliance but also productive and positive employee relations.