Only months after the FTC proposed a rule that seeks to virtually ban the use of noncompetes, a group of bipartisan U.S. Senators earlier this year initiated a legislative attack on noncompetes by reintroducing the “Workforce Mobility Act of 2023.” If passed, the bill will prohibit the use of noncompetes nationwide, except in limited circumstances.
Earlier this year, we reported on the FTC proposed rule (the FTC Proposed Rule) that, if passed, would severely limit the use of noncompetes. Now, legislators are seeking to accomplish a similar limitation on noncompetes through legislative channels with the introduction of The Workforce Mobility Act of 2023 (the Act). Specifically, the Act provides that “no person shall enter into, enforce, or attempt to enforce a noncompete agreement with any individual who is employed by, or performs work under contract with, such person with respect to the activities of such person in or affecting commerce.”
The Act, like the FTC Proposed Rule, includes narrow exceptions to its prohibition of noncompetes, including:
- The sale of goodwill or ownership interests;
- Senior executive officials executing severance agreements (i.e., an agreement that is part of the terms and conditions of the sale and provides at least one year’s compensation if employment is terminated) with a buyer or seller of a business entity, where the noncompete provision is limited in time (up to one year) and geographic scope and restricts the executive from performing any work that is similar to the work that the executive performed for the buyer or seller; and
- Partnership dissolution or disassociation.
While the Act permits non-disclosure agreements for the protection of trade secrets, the Act broadly defines a noncompete agreement as:
An agreement entered into after the date of enactment of this Act between a person and an individual performing work for the person that restricts such individual, after the working relationship between the person and individual terminates, from performing—
(A) any work for another person for a specified period of time;
(B) any work in a specified geographical area; or
(C) any work for another person that is similar to such individual’s work for the person that is a party to such agreement.
The definition’s scope is expansive but does not reference other restrictive covenants, such as non-solicitation provisions.
If enacted, noncompetes would no longer be a function of state law but rather would be governed by federal law. This change could result in increased efficiencies for employers because the current state-by-state system generally requires employers who value enforceable noncompetes to tailor such agreements based on the law where the employee signing the agreement lives. To become a law, however, the bill must pass both the U.S. Senate and House of Representatives. Given the bipartisan support, this is a possibility. However, due to strong business interests supporting noncompetes, litigation challenging an eventual law is likely, and whether the law would be enforced during the pendency of such litigation is currently uncertain.
MMM’s employment team will continue to monitor the legislation and regulations that seek to severely curb the use of noncompetes, including the FTC’s Proposed Rule. For more information on the FTC rule and noncompetes and what employers should be doing while awaiting the fate of noncompetes, please see our article here.
If you have any questions, please do not hesitate to reach out to a member of the Morris, Manning & Martin, LLP Employment Team.