Will Non-Compete Clauses Become a Thing of the Past?

Many employment contracts include language prohibiting employees from working for a competitor after the employee’s termination. A typical contract might include a clause like this:

“During the term of the Agreement and for a period of twelve (12) months after the date of termination of Employee’s employment with Company, Employee shall not, directly or indirectly be employed by or otherwise associated with as a consultant, independent contractor, or other capacity, any entity which competes with Company’s business within twenty (20) miles of Employee’s primary work location.”

But will these noncompetition clauses soon become a thing of the past?

The Federal Trade Commission has recently issued a proposed rule which would prohibit employers from imposing noncompete clauses on workers. The rule is based on the commission’s power under Section 5 of the Federal Trade Commission Act, which prohibits “unfair methods of competition in or affecting commerce.”

Finding that these restrictions are an unfair method of competition, the rule would ban employers from entering into noncompete clauses with both employees and independent contractors, as well as require employers to rescind any existing noncompete clauses.

Currently, courts typically uphold these non-compete restrictions if they are reasonable in terms of duration and geography. As a result, this proposed rule would be a major change to the employer-employee relationship in many professions, including physicians, sales representatives, and hair stylists.

It is important to remember that this a proposed, not a final rule. A final rule will be issued following a 60 day public comment period. And legal challenges could also follow before the rule takes effect.

In the meantime, do not hesitate to contact our office for guidance with your non-competition clause or to keep updated on the future of this potentially sweeping change.