FTC Issues Rule Banning Non-Compete Agreements in New Jersey and Nationwide

Non-compete agreements (NCAs) have long been a tool for safeguarding employers’ interests. However, non-compete agreements also stand as a potential obstacle for employees seeking new opportunities. After an employee is fired or resigns, their ability to get another job in the same field may depend on whether they signed an NCA when they began working for their former employer. Signing a non-compete agreement makes getting another job in the same field challenging after resigning or being fired. In New Jersey, strict laws govern the enforceability of non-compete agreements. However, a new rule issued recently by the Federal Trade Commission (FTC) promises to go beyond the boundaries set by state law.

Understanding the Meaning of Non-Compete Agreements (NCAs)

Non-compete agreements are contracts that employees sign shortly after they are hired that limit their ability to work for a competitor after their employment ends, either voluntarily or involuntarily. These agreements may also prevent an individual from setting up a business that competes with their former employer’s business. Employers ask employees to sign NCAs for various reasons, including protection of intellectual property, retention of a skilled workforce, and preservation of clientele. While NCAs benefit employers, some NCAs can pose substantial barriers to career advancement.

New Jersey law upholds non-compete agreements as long as they meet certain requirements. In New Jersey, three factors are considered when determining if a non-compete agreement is enforceable. First, an enforceable NCA must protect a valid interest for the employer. Second, the agreement must not place an undue hardship on the employee. Under this second test, an NCA must set reasonable geographic limits, and its duration must be reasonable. Lastly, for an NCA to be enforceable in New Jersey, it must not be harmful to the public interest.

Understanding the FTC Rule

In April 2024, the Federal Trade Commission (FTC) published a final rule prohibiting most non-compete agreements in New Jersey and nationwide after a 3-2 vote. The FTC passed the rule after determining that non-compete agreements violate Section 5 of the Federal Trade Commission Act of 1914. This Act prohibits unfair competition methods and allows the FTC to make rules against practices it considers unfair. According to the rule, non-compete clauses are a prohibited method of unfair competition. After the new rule goes into effect, employers cannot continue enforcing existing NCAs or requiring employees to sign these agreements. If the new rule goes into effect, it is expected to generate thousands of new businesses yearly, raise worker wages, lower healthcare costs, and boost innovation.

It is vital to note that, as with other laws, there are some exceptions to the FTC rule, including non-compete agreements signed by senior executives before the rule’s effective date and those subject to an ongoing cause of action on the effective date.

U.S. Chambers of Commerce Sues the FTC

After the rule was published, the U.S. Chambers of Commerce and other business groups filed a lawsuit against FTC. Other lawsuits are expected. At this point, whether and when the new rule will go into effect and in what form it will be allowed remains an open question.

Contact a New Jersey Employment Lawyer

If you have questions about the new FTC rule or need help with an employment law-related matter, contact a skilled New Jersey employment lawyer at the Trabosh Law Firm.

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