FTC Proposes Rule to Ban Noncompete Agreements in New Jersey and Nationwide

Employers often use provisions in employment agreements to limit employees’ activities after the employment relationship has ended. The purpose of these provisions is to protect employers’ business interests, but they can be harmful to employees. Non-compete agreements restrict employees’ job prospects by limiting their ability to work for a company that competes with their current employer. The Federal Trade Commission (FTC) estimates that around 30 million workers are currently subject to a non-compete agreement. New Jersey employment law sets several important limits on non-compete agreements but still allows them. Only a few states have enacted laws that place significant restrictions on them. In early January 2023, the FTC issued a proposed rule that would make most non-compete agreements an unfair method of competition under federal law. The agency is currently accepting comments from the public regarding the proposal.

From an employer’s point of view, a non-compete agreement stops an employee from taking all the training and experience they have received on the job to a competitor. In practice, however, non-compete agreements can be so broad that they make it difficult for former employees to find new jobs at all. Employers may also try to enforce them against employees who were laid off, not just employees who quit.

New Jersey courts generally allow non-compete agreements if they meet the following three criteria:
– The agreement protects a valid interest of the employer.
– It does not place an undue hardship on the employee.
– It does not harm the public interest.
To meet the second criterion, a non-compete agreement usually has to have limits on the type of work involved, the geographic area, and the duration. A non-compete agreement could be enforceable, for example, if it prohibits a former employee from working for another company in a specific market sector within five miles of the employer’s location for a period of six months.

Currently, New Jersey’s legal restrictions on non-compete agreements are based on caselaw. A bill pending in the New Jersey Legislature, A3715/S1410, would codify the three-part test mentioned above. It would limit the duration of all non-compete agreements to a maximum of twelve months and require employers to disclose the details of the agreement to an employee ahead of time.

The FTC’s proposed rule might supersede the New Jersey legislation, although neither has the force of law yet. The FTC’s authority comes from the Federal Trade Commission Act (FTC Act) of 1914. Congress passed the FTC Act during the Progressive Era when antitrust legislation was quite popular. The law prohibits “unfair methods of competition in or affecting commerce.” It gives enforcement authority to the FTC.

The agency issued a notice about the proposed rule on January 5, 2023, followed by publication in the Federal Register on January 19. The new rule would give a broad definition to the term “non-compete clause.” It would include almost any contractual provision that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business.” Employers would be required to rescind many existing non-compete agreements that violate the rule. The FTC is accepting comments from the public until March 20, 2023.

If you believe that your employer has engaged in unlawful workplace practices in New Jersey or New York, an experienced advocate can help you assert your rights. The employment lawyers at the Resnick Law Group are available to answer your questions and discuss your case. To schedule a confidential consultation, please contact us today online, at 973-781-1204, or at 646-867-7997.

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