The Federal Trade Commission in January proposed a new rule that would prohibit employers from imposing noncompete clauses on workers.
These clauses, which block workers from taking a job at a competing employer within a period of time or within a geographic location, are already unenforceable in California as well as in two other states, North Dakota and Oklahoma.
According to the FTC, one in five American workers—about 30 million people—are still subject to noncompete clauses. Under these agreements, workers lose opportunities to seek higher pay and better working conditions, and companies lose opportunities to hire qualified candidates.
The proposed rule would state that noncompete clauses are an unfair method of competition, would ban employers from entering into noncompete clauses with their workers, including independent contractors, and would rescind existing noncompete clauses and require employers to actively inform workers the contracts aren’t in effect.
The FTC estimates the rule would:
- Increase workers’ earnings by nearly $300 billion per year
- Save consumers up to $148 billion annually on health care costs
- Double the number of companies founded by a former worker in the same industry
- Close racial and gender wage gaps by 3.6 to 9.1 percent
The agency is also seeking public comment on:
- Whether franchisees should be covered
- Whether senior executives should be exempt
- Whether low- and high-wage workers should be treated differently under the rule
The U.S. Chamber of Commerce issued a statement asking the FTC to extend the comment period for an additional 60 days after March 10. The chamber’s statement also questioned whether the FTC has the legal authority to issue such a rule.
“This rulemaking, as the FTC itself acknowledges, will impact a significant portion of the economy,” the statement said. “Given the breadth of the rule, a sufficient comment period is needed to ensure the regulated community can fully assess its effects.
“Moreover, there are significant legal questions that must be addressed by commenters.”
Under California’s Business & Professions Code section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
It’s also against California public policy to fire an employee for refusing to sign an agreement containing a void noncompete provision, and doing so exposes an employer to wrongful termination liability. Moreover, the California Court of Appeals has extended that prohibition to employers that fire or refuse to hire someone because that person has signed an illegal noncompete agreement with another company.
Contrary to what some people think, there is no “trade secrets” exception to the blanket ban on employee noncompetes. Companies may prohibit former employees from using the company’s confidential information to benefit a competitor, but may not prevent an employee from going to work for the competitor in order to protect that confidential information.
Recent changes have made California law even more protective of employees. If you have signed or are being asked to sign a noncompete agreement, or are being threatened with a lawsuit based on such an agreement, contact Keller Grover for a consultation on your rights.