Nationwide Ban on Noncompete Agreements
By Lindsey Weidenbach
Written for Business World
In late April of this year, the Federal Trade Commission voted to approve a new rule which bans the use of noncompete agreement for all workers. Noncompete agreements, which keep millions of employees — from minimum-wage earners to CEOs — from switching jobs within their industries, were limited in Washington State back in 2020, but with this new rule, noncompetes will be unenforceable. The ban is retroactive and will render existing noncompetes completely unenforceable for all works except senior executives, whose existing noncompetes will remain in force. The term “senior executive” is defined as those earning more than $151,164 a year and who hold a policy-making position.
The FTC’s action appears to be on the heels of President Biden’s direction to the agency to "curtail the unfair use" of noncompetes, under which employees effectively sign away their ability to work in their field of expertise or seek opportunities in their industry as a condition of getting or keeping their current job. The president's executive order urged the FTC to target labor restrictions others that improperly constrain employees from seeking work as a way to stimulate the economy and level the playing field.
This is essentially the argument in favor of banning noncompetes. Employees have an economic liberty to seek new employment within their field of expertise and the use of noncompetes to keep those workers from being gainfully employed is bad for the economy and for the advancement of these industries. The hope of those in favor of the ban is that it will create or opportunities for American workers.
The argument against this ban and for the use of noncompetes is rooted mainly in an employer’s right to protect its trade secrets and confidential information that the employee might learn through his or her time with the company. Because these concerns are mostly applicable to senior executives, Washington State’s restriction of noncompetes allowed noncompete agreements for those making over $100,000 (in 2020 and adjusted for inflation) and the covenant is only enforceable within the State boundary, among other restrictions. See Chapter 49.62 RCW for more information.
The U.S. Chamber of Commerce said it would bring suit to block "this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked." The trade group said that the rule will undermine American business practices and harm their ability to be competitive.
The FTC estimated that 30 million people (one in five U.S. workers) are bound by noncompetes and that if these workers are allowed to freely work, wages could increase by a total of nearly $300 billion a year. It appears that the FTC balanced this economic boon against the fears from employers that their trade secrets and other confidential information would be disseminated.
In favoring the fan, the FTC noted that employers have other ways to protect their intellectual property. Employers can continue to use Nondisclosure Agreements (NDAs) or similar agreements that restrict the disclosure or use of company trade secrets, confidential information and intellectual property.
Given that Washington State already restricted the use of noncompetes back in 2020, this new rule will not greatly affect Washington workers and employers, but it will certainly impact those senior executives who were bound by valid noncompetes, and businesses who have employees under currently valid noncompete agreements.
If you are an employer who uses noncompete agreements and the agreement also contains confidentiality provisions and disclosure restrictions, you may think about amending those currently existing agreements to release the employee voluntarily from his or her noncompete in order to protect and maintain provisions that safeguard your company’s intellectual property. A voluntary release might be exchanged for reiteration of the nondisclosure and confidentiality elements of the agreement. Additionally, future agreements with existing employees will need to be tailored in light of the new policy so that employers don’t invalidate these important provisions because of the inclusion of banned noncompete language. It will be important to review and revise these agreements as soon as possible so that possible exposure for your company can be identified and mitigated.
This is also true for workers bound by these agreements. If you are not a “senior executive” under the federal definition, the noncompete will soon be invalid and it will be important to know your rights upon the ban taking effect.
GGW Law is a law firm located in Cashmere, Washington and focuses on the business and real estate needs of its varied clients. GGW attorneys have extensive experience and regularly advise their clients on the topics covered in this article. This article does not contain legal advice nor create an attorney-client relationship. GGW is however accepting new clients at this time.