By Joseph G. Ballstaedt
801-365-1021
joe@snjlegal.com
The Federal Trade Commission (FTC) recently announced it is considering a rule that would ban all non-compete agreements. A non-compete agreement (or non-competition agreement) is a clause in an employment contract that prohibits the employee from seeking or taking a certain type of employment after the conclusion of the employee’s employment with the employer. Non-competes sometimes last quite some time after employment ends, although in Utah they are usually limited to one year. They can seriously deter employees from seeking or taking new jobs. The proposed rule would significantly change the legal landscape in Utah regarding employment relationships.
This article discusses why the FTC’s rule would be binding on Utah, how the proposed rule would specifically ban non-competes, what would happen to existing non-competes, the one exception to the total ban on non-competes, and when the proposed rule might take effect.
Would the FTC’s proposed rule be binding on Utah?
The FTC’s rule would be binding on Utah and override any conflicting Utah law. Section 5 of the Federal Trade Commission Act, a federal law, makes it unlawful to engage in unfair methods of competition. That law, however, does not clearly define what constitutes unfair competition. The Federal Trade Commission Act created the FTC, which has the authority to identify and police against unfair competition. The FTC enacts regulations that identify and make unlawful practices that it considers to be unfair competition. Because federal regulations superseded and override state laws, if the proposed rule becomes law, it would trump any conflicting Utah laws.
What does the proposed FTC rule specifically ban?
The FTC’s proposed rule would essentially ban non-compete agreements between employees and employers. Specifically, employers would not be able to:
· Enter (or attempt to enter) into a non-compete with an employee
· Maintain a non-compete with an employee
· Represent without a good-faith basis that an employee is subject to a non-compete
The rule defines a non-compete 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.” The rule would apply to and protect many types of workers, ranging from paid employees and independent contractors to unpaid volunteers and apprentices. Essentially, any type of employment or worker relationship is covered.
Also, just because a contract clause isn’t labelled as a non-compete, the new rule would likely ban it if it functions like a non-compete or prohibits the worker from seeking or accepting employment after the conclusion of the worker’s employment. For instance, a non-disclosure agreement, if written too broadly, could effectively prevent the worker from working in the same field after employment. Also, a clause requiring repayment of training costs might do the same, as well as a non-solicitation agreement. Any such contract provision would likely be considered a non-compete and would be banned.
What would happen to existing non-compete agreements?
The proposed rule requires employers to rescind existing non-compete agreements. It also requires employers to notify current and prior employees that the non-compete has been rescinded and is no longer valid. So, if an employer in Utah has a one-year non-compete with an employee who quit six months ago, the Utah employer would have a duty to notify the former employee that the non-compete is no longer valid.
Are there any exceptions to the rule?
Yes, there is a limited exception to the total ban on non-competes. It would not always apply to a non-compete restricting a person who sells a business or assets of a business. So if the owner of a dental clinic sells her practice, the buyer can still likely have the dentist sign a valid non-compete. The buyer would not be prevented from forcing the dentist to agree that she won’t practice dentistry in a certain reasonable area and for a reasonable time.
When would the rule take effect?
The FTC is currently accepting and will review the comments on its proposed rule. It may make changes to the final rule based on those comments and further analysis of issues related to non-competes. The comment period is open until Mar 10, 2023. At this point, everything is up in the air. The proposed rule might not survive or be fully implemented due to public comments and concerns, among other factors. Even if the rule is enacted, it could face various legal challenges.
Need help with non-compete and other employment issues?
If you are an employer who wants to protect your business with certain restrictions such as non-competes, non-solicitation agreements, or other restrictive covenants, this new rule could affect the way you are required to conduct business. You may have other employment-related questions. If you are an employee who has signed a non-compete, and you are contemplating leaving your current job, the FTC’s proposed rule could benefit you moving forward. Whether you are an employer or an employee, I am happy to discuss your legal needs. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com.
