FTC Proposes Rule Banning Non-Compete Provisions: How Would It Impact Nevada Employers?
On January 5, 2023, in a 3-to-1 vote, the Federal Trade Commission proposed eliminating non-compete provisions in employment agreements, with limited exceptions. The proposed Non-Compete Clause Rule was not entirely unexpected due to President Biden’s July 9, 2021, Executive Order which requested the FTC to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” If enacted, the rule would preempt laws in States which, often with restrictions, allow businesses some flexibility in using non-compete clauses and agreements. Nevada is one such State. In 2017, the Nevada Legislature enacted NRS 613.195 to address covenants not to compete and, in 2021, made a material change that precludes enforcement of a non-compete against employees who are “paid solely on an hourly wage basis, exclusive of any tips or gratuities.”
In the Legal Update below, Kristen Gallagher, Co-Chair of McDonald Carano’s Employment & Labor Law Practice Group, outlines the key provisions of the FTC’s proposed rule, explains the potential impact on Nevada employers, and provides an update on Nevada’s current non-compete statutory environment.
Kristen’s Legal Update is also available as a printable PDF here.
- Next Steps for Nevada Employers
- Summary of FTC’s Proposed Regulation
- Nevada’s Current Non-Compete Statutory Environment
1. Next Steps for Nevada Employers
Urgently Submit Comments
- Numerous steps need to happen before the proposed regulation can go into effect. A formal notice of proposed rulemaking must be published in the Federal Register and interested organizations have 60 days – through March 10, 2023 – to submit comments; then the FTC will prepare a final rule. In addition to likely litigation against the final rule, there is at least a 180-day grace period for implementation.
- Businesses concerned about the proposed regulation should urgently submit comments to the FTC describing their objections and providing possible alternative regulatory language, if any.
- The FTC also published a fact sheet that notes the FTC is specifically seeking comments on the following topics: (1) whether franchisees should be covered by the rule, (2) whether senior executives should be exempted from the rule or subject to a rebuttable presumption rather than a ban, and (3) whether low- and high-wage workers should be treated differently under the rule.
It is anticipated that business groups and others will comment and challenge the FTC’s authority to issue the proposed rule, as well as the scope of the proposed prohibition, including its proposed retroactive effect.
Prepare to Review Current Non-Compete Provisions and Agreements
Nevada employers should review current non-compete provisions, policies, and procedures to:
- Assure compliance with Nevada’s current statutory requirements and prohibitions that remain in effect until and unless the FTC’s proposed rule takes effect.
- Plan and prepare for changes that may have to be made if the FTC’s proposed rule becomes law, including (1) review existing agreements for compliance with the proposed rule’s “de facto” test, (2) rescission of existing non-compete agreements and communication with current and former employees that those agreements are no longer in effect, and (3) removal or modification of non-compete language from standard employee agreements, handbooks and policies.
Anticipate FTC Pursuing Investigations and Enforcement Action under Section 5 during the Rulemaking Process
- The day before announcing the proposed rule, the FTC brought its first-ever enforcement actions against the use of non-competes. The FTC announced orders in connection with several companies that it reported had collectively required thousands of employees to sign, what it deemed to be, unreasonable and unenforceable non-compete agreements. In one example, a security company required at, or near, minimum wage employees to sign non-compete agreements containing a two-year, 100-mile radius restriction. Further, the non-competes included a hefty monetary penalty of $100,000 for any alleged violation. Under the FTC’s orders, the companies must eliminate the provisions and cease enforcing non-compete agreements against employees and take additional action consistent with eliminating the non-competes.
- Despite uncertainty about the proposed rule, the FTC may continue to bring enforcement actions under Section 5 of the FTC Act. Employers should consider reviewing noncompete and non-solicitation agreements, particularly those involving large numbers of low-wage employees and/or large penalties compared to the wages of impacted employees. Alternative options may be available to address concerns about confidential information or trade secrets.
2. Summary of FTC’s Proposed Regulation
The FTC proposes eliminating non-compete provisions on the basis of such clauses being an unfair method of competition.
Proposed Rule Would Prohibit
- Non-compete agreements in nearly all circumstances and regardless of the worker’s profession or compensation level.
- Non-compete agreements retroactively and going forward.
- Non-compete agreements beyond “employees” to include such agreements with independent contractors, volunteers, and interns.
- “De Facto” non-compete agreements, which the proposed rule describes as other agreements with employees, such as non-disclosure agreements, that are “written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment.” The proposed rule includes a fact-based functional test to determine whether a contractual term or agreement is a “de facto” non-compete.
Proposed Rule’s Non-Compete Rescission Requirements
- Rescind preexisting non-compete agreements within six months of the effective date of the new rule.
- Notify current and former employees of the rescission within 45 days of the rescission.
- Employee non-compete agreements made in relation to the sale of a business or a business unit if the restricted party is a 25% or greater owner of the business or business unit being sold.
- Non-employment related non-compete agreements, such as between businesses relating to the sale of a business or operating assets.
- Other provisions or agreements with employees, such as agreements prohibiting the solicitation of customers and non-disclosure agreements (unless such arrangements or contractual terms constitute a “de facto” non-compete agreement as determined by the rule’s functional test).
- “Concurrent-employment restraints” which restrict what an employee may do during employment, such as prohibiting current employees from working part-time for a competitor.
- Some businesses may not be subject to the proposed regulation “to the extent that they are exempted from coverage under the FTC Act.” Possible examples include nonprofits, common carriers, certain banks, and persons subject to the Packers and Stockyards Act of 1921.
3. Nevada’s Current Non-Compete Statutory Environment
In Nevada, NRS 613.195 et seq. governs non-compete agreements in the employment context.
What Nevada Law Does Allow
- Employers and employees in Nevada may agree to restrictive covenants prohibiting employees, after termination of the employment relationship, from: (1) competing with the employer, whether through employment in the same field as the employer or by the employer’s competitors and (2) disclosing information learned while working for the employer, including trade secrets, business methods, customer lists, secret formulas or processes or confidential information.
- Non-compete agreements must be (1) supported by valuable consideration and (2) reasonable in scope and duration. Reasonableness of duration (and geographic restriction) depends on specific facts and circumstances of the case. To be enforceable, the restrictions must also be reasonably necessary to protect the employer’s business and goodwill.
What Nevada Law Does Not Allow
- A non-compete agreement cannot apply to an employee paid on an hourly basis, exclusive of tips or gratuities. If a court, in an action brought by the employer or the employee, finds the non-compete agreement was applied to an hourly employee, it must award the employee reasonable attorneys’ fees and costs.
- A non-compete agreement must (1) not impose any restraint greater than that required to protect the employer’s interests, (2) not impose an undue hardship on the employee and (3) only have restrictions that are appropriate in relation to the valuable consideration supporting the non-compete agreement.
- A non-compete agreement cannot restrict a former employee from providing a service to a former customer or client if each of the following apply: (1) former employee did not solicit the former customer or client, (2) customer or client voluntarily left and sought the former employee’s services, and (3) former employee complies with the non-compete agreement’s provisions regarding time, geographic area, and scope of the restrained activity. However, this does not apply if: (1) former client or customer seeks the former employee’s services and (2) former employee did not initiate contact with the former client or customer. In an action brought by the employer or the employee, if a court finds that the employer has restricted an employee in this manner then the court must award the employee reasonable attorneys’ fees and costs.
- If a reduction of force, reorganization, or similar restructuring of the employer results in the termination of employment, a non-compete agreement is enforceable only while the employer pays the employee’s salary, benefits, or equivalent compensation, including severance pay.
Nevada State Courts Must Revise the Agreement (“Blue Pencil”)
Under NRS 613.195(6), Nevada State courts must modify (“blue pencil”) a non-compete agreement that is otherwise found to be supported by valuable consideration if it is unreasonable in duration, geographical area, or scope of the restrained activity and would impose (a) a greater restraint than necessary to protect the employer’s interest or (b) undue hardship on the employee. The court will revise the agreement to the extent necessary to comply with Nevada law.
The FTC’s proposed rule is the first time the Commission has embarked on rule-making that so broadly prohibits business conduct on competitive grounds, and with substantial impact desired by the rule. The dissenting Commissioner, Christine S. Wilson, issued a statement that questions the authority and authorization of the FTC to issue the notice of proposed rulemaking. The U.S. Chamber of Commerce has also voiced its intent to initiate a court challenge to the proposed rule. Thus, the breadth and limits of the FTC’s rulemaking powers are far from settled.
Please contact Kristen Gallagher with any questions about the FTC’s proposed rule and how to navigate non-compete provisions and agreements in Nevada. The information in this Legal Update does not, and is not intended to, constitute legal advice; instead, all content is provided for general informational purposes. Do not act or refrain from acting on information in this Legal Update without seeking professional legal counsel.
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