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Approximately 18% of all employees in the United States are covered by some type of non-compete agreement, which is a contract that prevents employees form working for competitors after their current employment ends. These agreements are usually limited in time and location, but the Federal Trade Commission (FTC) has made a preliminary finding that non-compete agreements constitute an unfair method of competition.

The Need to Impose Limitations on Non-Compete Agreements

The FTC has proposed a new rule that would ban employers from forcing their employees to sign non-compete agreements as a condition of employment. Non-competes are considered to suppress wages, hinder innovation and impede entrepreneurs from starting new businesses. The FTC expects that the new proposed rule will increase wages by nearly $300 billion per year and increase career opportunities for nearly 30 million Americans.

It is argued that non-compete agreements prevent employees from freely changing jobs in order to find better salaries or working conditions. The agreements are also seen as vastly limiting the hiring pool for new and existing businesses.

What to Expect from the FTC’s New Proposed Rule

In order to address these issues, the FTC’s proposed new rule will generally prohibit employers from using typical non-compete clauses and make it illegal for employers to either enter into, or attempt to enter into, a non-compete agreement with an employee. It will also make it illegal to maintain a current non-compete agreement with an employee or to represent to an employee that he or she is subject to a non-compete.

This new rule would also apply to independent contractors and any employee regardless of whether they are paid or unpaid. This means that employers would be required to revoke all existing non-compete agreements and directly inform employees they are no longer in effect.

Other Types of Restrictive Covenants

There are several types of restrictive covenants such as non-solicitation agreements and confidentiality or non-disclosure agreements. A non-solicitation agreement prohibits a former employee from soliciting its former employer’s current, prior or prospective customer. Similarly, these agreements can prohibit a former employee from soliciting the former employer’s employees to work at a competing business. Confidentiality agreement prevent former employees from disclosing or using the proprietary or confidential information of the former employer while working at a new company.

The FTC’s new proposed rule does not generally apply to other types of employment restrictions, such as non-disclosure agreements. However, other types of employment restrictions could fall under the new rule depending on how broad they are.

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