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Article | Global News Briefs

United States: Proposals to end non-compete clauses in the U.S., at-will employment in New York City

By Gary Chase | January 31, 2023

A U.S. proposal would put an end to most workforce non-compete agreements, while New York City is considering effectively ending at-will employment for most workers.
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The Federal Trade Commission (FTC) has issued a 216-page proposed rule that, if finalized, would prohibit most non-compete agreements between an employer and a worker. The rule cites recent research that finds the use of non-compete agreements has, among other things, negatively affected labor, product and service markets as well as annually reduced wages by nearly $300 billion for workers across the labor force. The comment period on the proposed rule runs through March 10, 2023. The rule would apply to most employers, with some exceptions for banks, insurance companies, transportation and communications common carriers, air carriers and other select entities that are exempt from coverage under the Federal Trade Commission Act.

Separately, the New York City Council is considering the Secure Jobs bill, which would, among other things, only allow employers to terminate the employment of most workers for just cause or a bona fide economic reason (as defined in the bill) unless the termination is due to an egregious failure to perform duties or for egregious misconduct. In the U.S., employment is generally “at will,” meaning that employers may terminate an employee for any legal reason and with no notice (variations and exceptions may apply based on any contractual terms or state/municipal legislation). The bill’s provisions are based on a 2021 New York City law that generally ended at-will employment in the fast-food industry.

Key details

Proposal to ban non-compete clauses:
  • Employers would not be permitted to enter into or maintain a non-compete clause, or represent to a worker that he or she is subject to a non-compete clause. Employers would be required to rescind existing non-compete clauses no later than the rule’s compliance date (180 days after publication of the final rule) and notify the worker involved; however, anything negotiated in exchange for the non-compete would remain in effect.
  • A non-compete clause is defined as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.“ The proposed rule, however, may also apply to other types of employment restrictions (e.g., non-disclosure agreements) if they are broad enough to function as a non-compete clause. The proposed rule provides two examples of this type of “de facto” non-compete clause:
    • A non-disclosure agreement that is written so broadly that it effectively precludes the worker from working in the same field after the employee ceases employment with the employer
    • A contractual term that requires the employee to pay the employer or a third-party entity for training costs if the employee’s employment terminates within a specified period, where the required payment is not reasonably related to the employer’s costs to train the employee
The Secure Jobs bill:
  • The discharge (including certain reductions in hours) of an employee in New York City who has completed his or her probation period, if any, would be permitted only for just cause or a bona fide economic reason, with the burden of proof being on the employer, and only after the employer has used “progressive discipline.”
  • For a termination to be considered for just cause or a bona fide economic reason, an employer must provide at least 14 days’ advance notice of the discharge and, within five days of the notice, provide the reasons for discharge in writing.
  • The requirements described above would not apply to a termination due to either an egregious failure by the employee to perform his or her duties or for egregious misconduct.
  • The use of electronic monitoring in discharging or disciplining employees would be subject to specific limitations.
  • The bill includes limited exemptions for employees in the construction industry and certain collectively bargained employees.

Employer implications

The proposals would present significant changes in the regulation of employment nationally and in New York City. Employer groups are expected to oppose both proposals (with the U.S. Chamber of Commerce already asserting that the FTC doesn’t have the authority to make such a rule). Employers should monitor the status of both measures closely.

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