On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed new rule that would ban new non-compete agreements for workers and nullify existing non-compete agreements. If the rule goes into effect, businesses will be required to notify current and former workers in writing that their non-compete agreement is no longer in effect.
The “Functional Test” Would Prohibit Other Provisions that Act as Non-Compete Restrictions
Employers should review their current employment agreements carefully, even if they don’t contain express non-compete provisions. The proposed rule imposes a “functional test” that would prohibit any contractual provision that “has the effect of prohibiting the worker from seeking or accepting employment.”
Non-disclosure provisions or clauses requiring workers to reimburse a former employer for training costs would be permitted under the proposed new rule. However, these need to be carefully constructed to avoid being thrown out by the FTC as non-compete agreements in disguise.
Exception for Former Owners in the Sale of a Business
The proposed rule is only for non-compete agreements for workers – including both employees and independent contractors. However, it still allows for non-compete agreements entered into during the sale of a business that prevent former owners from competing against their old company.
Non-Compete Agreements are Legal in Ohio, Subject to Certain Restrictions
Non-compete agreements are common in the business world and are currently legal everywhere in the United States except California, North Dakota, Oklahoma, and Washington, D.C. However, many other states have recently introduced various restrictions, such as prohibiting them unless a worker earns above a certain amount.
Even in those states where non-competes are generally legal, the law imposes various restrictions on how broad they can be. In Ohio, a non-competition agreement generally is legal as long as it:
- Only covers a reasonable geographic area.
- Only lasts for a reasonable length of time.
What is considered “reasonable” is based upon the facts of the situation and the nature of the business in question. What is reasonable for a doctor is not necessarily reasonable for an engineer or a forklift operator. A court considering the question needs to weigh three major factors:
- The business’s legitimate interest in the restriction
- The hardship faced by the former employee.
- The damage caused to the public, if any.
Because of the ambiguity of this standard, non-compete clauses must be carefully written to avoid being thrown out as overly restrictive. This is especially true in today’s interconnected business world, where the internet and work-from-home arrangements make it more and more difficult to determine a reasonable geographic scope or even where an individual is truly “working” for the purposes of a non-compete.
Proposed Rule is Subject to Change, Pending Public Comments.
The effective date of the proposed rule remains unknown. The FTC will begin collecting public comments for 60 days once the proposed rule is published in the Federal Register.
The attorneys at Critchfield, Critchfield & Johnston will continue to monitor updates to this situation to keep clients informed of the latest developments. Critchfield’s attorneys advise and litigate on matters related to non-compete and other restrictive employment covenants, including non-solicitation, confidentiality, and trade secrets.