Noncompete agreements, common in the debt collection industry, could become unenforceable at the federal level if a proposed Federal Trade Commission (FTC) regulation becomes effective.

The proposal defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

The proposal on January 5, 2023, is in the early administrative rulemaking stages. Based on a preliminary finding “that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.,” the regulation would render unenforceable all existing and future noncompete agreements.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. Employers with existing noncompete agreements would also be required to inform current and former workers of their unenforceability.

The FTC explains that the designation of noncompete agreements as unfair methods of competition results from the agreements’ preventing workers from freely switching jobs, as well as depriving competing employers of skilled workers.

The proposed rule would generally not apply to other employment restrictions, like non-disclosure agreements. But, other employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetesOnly the FTC itself could pursue rule violations because the regulation would not establish a private cause of action for employees.

The rule change faces staunch opposition, particularly from the U.S. Chamber of Commerce. Employers should be aware of the regulation as it progresses through the rulemaking process and be prepared to lose their right to enforce noncompete agreements.

Have questions about the proposed rule and its effect on your business? Don’t worry – we are here to help!

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