What Employees Should Know About the FTC's Proposal to End Noncompete Agreements

The Federal Trade Commission (“FTC”) proposed a rule that would stop employers from imposing noncompete agreements upon their employees. This rule is not in effect, and is in the early stages of the administrative process. However, if the rule went into force, it would likely increase employee wages and mobility. To understand why, it’s important to understand how noncompetes are currently treated under the law.

The Current Legal Landscape for Noncompete Agreements

Right now, California, North Dakota, Oklahoma, and Washington D.C. already ban noncompete agreements, with a few exceptions. In some states, like Colorado, Illinois, Maine, New Hampshire, Oregon, Rhode Island, and Washington, noncompete agreements are prohibited unless an employee’s earnings exceed a minimum threshold. Some of these states, and others like Hawaii, will only enforce noncompete agreements if they are specifically related to protecting trade secrets, confidential information, or customer relationships.

However, in other states (including Pennsylvania), a noncompete agreement is more generally enforceable if it is necessary to protect a business’s interests, and the limitations are reasonable in duration, geographic range, and scope relative to the business’s interests.

Depending on the circumstances and applicable state law, employers can restrict employees from working for a competitor for up to two years. Employers that conduct international business (for instance, many technology companies) can often restrict employees from working for a competitor anywhere in the world. Conversely, if a noncompete agreement is silent on, unlimited, or otherwise too broad in duration, geographic range, or scope, it may be unenforceable.

Notably, in Pennsylvania, courts additionally follow the “blue pencil” rule, meaning that if a noncompete is too broad as written, a court has discretion to adjust the terms itself and enforce a less restrictive version. In this regard, Pennsylvania’s law on noncompete agreements is particularly unfavorable for employees, who, in the absence of this rule, might not be bound to an unenforceable noncompete.

If an employer prevails in its claim for breach of a noncompete agreement, a breaching employee may be subject to an injunction requiring them to leave the new job, or may be required to pay liquidated damages, damages for lost profits, court costs and attorneys’ fees, and/or punitive damages, depending on the terms of the agreement and the circumstances of the breach.

Noncompete Agreements Restrain Wages and Mobility

Regardless of whether a noncompete provision is valid and enforceable, however, many employees voluntarily follow the terms of a noncompete either because they do not know if it is enforceable or to avoid the headaches of a lawsuit. Employers know this, and often include overly restrictive noncompete provisions into employment agreements to deter employees from seeking work with competitors, even if the employer has no intention of enforcing the agreement in court.

Because a career change is among the most effective ways for employees to obtain higher wages, the chilling effect of noncompete agreements on worker mobility allows employers to pay less and compete less to retain employees.

It is estimated that more than 30 million employees, or nearly 20% of the domestic workforce, have signed noncompete agreements, at a cost to employees of more than $300 billion each year.

The FTC’s Proposal to Ban Noncompete Agreements

While the FTC’s proposal to ban noncompete agreements would clearly benefit employees, the proposal remains in the early “notice and comment” phase of the rulemaking process, until March 10, 2023. After the “comment” period, the proposed rule may change significantly. Furthermore, before any such rule would go into effect, it would likely be subject to numerous legal challenges from employers.

Consequently, while employees, particularly in Pennsylvania, may be cautiously optimistic that more favorable rules regarding noncompete agreements are on the way, for the foreseeable future, the old rules still apply.

Contact an Experienced Pennsylvania Employment Law Attorney

If you think you are subject to a noncompete agreement and are contemplating a career change, or if an employer claims you have breached a noncompete agreement, it is essential to have an employment attorney on your side to ensure that your rights are protected. Located in Pittsburgh, Stember Cohn & Davidson-Welling LLC is dedicated to providing high-quality counsel to employees throughout Western Pennsylvania. Call (412) 338-1445 or contact us to schedule a consultation.