In early January of 2023, the Federal Trade Commission (FTC) announced the proposal of a new rule designed to uniformly ban noncompetes due to their adverse impact on independent contractors and employees, including those not under employment restriction. In addition to highlighting estimated annual wage loss of nearly $300 billion per year as a result of noncompetes, this newly proposed rule also cites the detrimental consequences of noncompetes on innovation and entrepreneurial growth.
In this article, we’ll explore the legal basis for the FTA’s proposed rule and how companies should prepare to remain compliant and avoid newly inflation-adjusted financial penalties.
Legal Basis and Recent FTA Enforcement of Section 5
The legal groundwork for the FTA’s newly proposed rule is Section 5 of the Federal Trade Commission Act, which guards against unfair methods of competition. The newly proposed rule is in alignment with recent legal action taken by the FTC, which enforced Section 5 against three employers coercively using noncompetes with low-wage employees or to prevent employees from pursuing employment with an industry competitor. These enforcement measures are an outgrowth of the FTC’s renewed investment in applying the protections of Section 5, as well as a partnership between the FTC and the National Labor Relations Board (NLRB). In a joint 2022 memorandum of understanding, both organizations publicly reaffirmed their commitment to “bolster[ing] […] efforts to protect workers by promoting competitive U.S. labor markets and putting an end to unfair practices that harm workers.”
How Section 5 of the FT Act Was Applied to Companies Using Noncompetes
During recent enforcement of Section 5 against three companies found in violation of its provisions, the FTC ordered all of the following actions from the affected businesses:
- To cease the enforcement of any noncompete restrictions on employees and halt all communication that suggests an employee is subject to a noncompete (to employees and potential employers/competitors alike).
- To notify employees that they are no longer subject to any noncompete contracts or restrictions.
- To void and nullify all identified/eligible noncompetes.
- To provide current and former employees copies of the FTC’s order and copies of the complaint and order to any employees of the company who will be involved in recruitment, hiring, or onboarding now or in the future.
- To notify all new employees that they are entitled to seek or accept new employment, operate a separate business, or compete in the same industry post-employment. In its recent enforcement, the FTC required that each business share these terms with all new employees for a period of at least 10 years.
How to Prepare for the FTC’s Potential New Rule
Keeping in mind the FTC’s recent enforcement of Section 5, and the requirements placed on the three cited employers, we’ll now explore what the newly proposed FTC rule would require from employers and how your business can prepare for compliance.
Overall, the FTC’s newly proposed rule would bar employers from creating or enforcing noncompete clauses. Employers could no longer legally enter into a noncompete with an employee, maintain a noncompete, or suggest to an employee that they are restricted by a noncompete agreement. They would also be required to inform all employees that all existing noncompetes are null and void.
Although the new rule would not impact non-disclosure agreements, the terms regarding noncompetes would apply to all those who work for the company (paid and unpaid), including independent contractors, part-time employees, and full-time employees.
The FTC’s proposed rule can be reviewed in its entirety at the following address and is open to public comment until March 10, 2023.
Increased Noncompliance Penalties
In conjunction with a range of Section 5-related updates, the FTC has also recently adjusted the financial penalties for violations of Section 5 of the FTC Act and other pieces of related legislation like Section 525(b) of the Energy Policy and Conservation Act and Section 7A of the Clayton Act.
Effective on January 11, 2023, inflation-adjusted maximum civil penalty amounts will increase from $46,517 to $50,120 for violations of any of the aforementioned Acts. Additionally, maximum penalties for violations of Section 10 of the FTC Act will increase by nearly 8% and violations of Section 814(a) of the Energy Independence and Security Act of 2007 will also increase by approximately 8% to $1,426,319.
Ensure Long-Term Compliance with The Orsus Group
Whether it applies to noncompetes or other employment contracts, changing regulations and new legislation can impact your business’ policies and day-to-day operations in unexpected ways. The Orsus Group can create and execute a comprehensive HR plan to help you attract top talent, reduce costs, and avoid financial penalties by staying fully compliant with shifting regulations.
Contact us today to let us know how we can support your business’ hiring and compliance efforts.