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On Tuesday afternoon, the Federal Trade Commission will vote on a new rule that would ban employers from imposing noncompete clauses on their employees in most circumstances.
The rule to be voted on is the revised version of a rule first proposed by the FTC in January 2023, though the revisions that have been made to that original rule have not yet been made public.
The original rule was a result of the FTC’s concerns surrounding restrictive labor practices, as a noncompete agreement limits an employee’s ability to start a competing business or work for other employers. The agency says a ban on noncompete clauses could increase wages by $300 billion per year because employers would need to do more to retain their employees.
If the final rule is approved—and it is expected to be—it would likely become illegal for employers to enter into noncompete agreements with their employees and existing noncompete agreements would likely need to be rescinded. The original rule did include an exception for noncompete agreements between the buyers and sellers of a business, but only if the sellers each hold at least a 25% ownership interest in the business being sold.
According to Jude Bursavich, partner at Breazeale, Sachse & Wilson LLP, the ban would constitute federal overreach on an issue that is best left to the states.
Louisiana already has one of the strictest laws on noncompete clauses in the U.S., making such clauses difficult to enforce. Courts in most states consider whether a restriction is reasonable or not, but in Louisiana, noncompete clauses are presumed to be null and void unless they meet a strict set of criteria laid out in statute. Read more about how noncompete clauses work in Louisiana here.
“This is a state issue,” Bursavich says. “This is not a federal issue.”
If the final rule is approved, Bursavich says businesses might greatly cut back on employee training because competing businesses would be free to poach any newly trained employees without fear of repercussion, and business sales might also be stifled if buyers and sellers do not qualify for the aforementioned exception.
“Why would a buyer purchase a business when the seller can open up a competing business across the street the very next day and take the clients that were just purchased by the buyer?” Bursavich asks.
In March 2023, the Baton Rouge Area Chamber and the Louisiana Association of Business and Industry joined other leading business groups across the U.S. to publicly oppose a ban on noncompete agreements. Supporters of noncompete agreements say they help protect customer data as well as trade secrets.
Intense litigation is likely to ensue if the final rule is approved. Notably, the U.S. Chamber of Commerce has already vowed to immediately challenge the ban in court.
