On April 23, the US’ Federal Trade Commission (US FTC) published the final version of a rather controversial new rule, which will introduce a nationwide ban on the use of post-termination non-competition clauses (NCCs) by employers. The final rule will become effective after the lapse of 120 days from its publication in the Federal Register.
NCCs are not only prevalent in the US, but are also quite widespread in the EU. Will the EU follow the US lead in proposing some form of EU-wide regulation restricting the use of post-termination NCCs in employment relationships? And if so, should post-termination NCCs in employment contracts be completely banned as proposed by the US FTC, or simply limited to reduce their anti-competitive and restrictive effects?
What are non-competition clauses?
While there is no single universal definition of the term ‘non-competition clause’, or in short, ‘non-compete clause’, this generally refers to a contractual promise undertaken by an employee, binding himself/herself to refrain from conducting business of a similar nature to that of the employer.
NCCs typically impose restrictions on what an employee can do after the employment relationship has been terminated, regardless of whether the employee has resigned from said employment, or whether the employment relationship has been terminated by the employer. These types of NCCs are typically referred to as ‘post-termination’ NCCs.
The main function of a NCC in the context of an employment relationship is that of protecting a company’s business interests, by preventing employees from making use of ‘insider’ knowledge and skills which they would have gained through their employment with a particular company to the benefit of an existing competitor, or to start their own business in competition with that of their former employer.
The US FTC’s rule banning the use of non-competes
The final rule which was published by the US FTC on April 23, in essence, provides that it is an unfair method of competition (and thus in violation of Section 5 of the US Federal Trade Commission Act which deems ‘unfair methods of competition’ to be unlawful) for employers:
• to enter into or attempt to enter into a post-termination NCC with a worker;
• to maintain a post-termination NCC with a worker; or
• to represent to a worker that he/she is subject to a post-termination NCC where the employer has no basis to believe that the worker is subject to an enforceable NCC.
Under the final rule, existing NCCs for senior executives can be retained but cannot be enforced by employers, and employers are prohibited from entering into new NCCs with senior executives. The final rule defines senior executives as workers who occupy policymaking roles, and who earn more than $151,164 annually.
Additionally, employers will also be obliged to inform workers bound by an existing NCC that the NCC will not be enforced against them in the future.
A look at the EU situation
In terms of the situation in Europe, in view of the virtually non-existent intervention of the EU in regulating the use of post-termination NCCs in employment contracts, member states have been predominantly left to their own devices and thus, there is quite frankly a ‘hodgepodge’ of widely varying frameworks in place across the different member states.
The regulation of post-termination NCCs in employment contracts varies quite significantly across the different member states, both in terms of form and content, with some member states having elaborate and clear statutory provisions regulating the validity of NCCs in employment contracts, and others with a largely uncertain approach on the topic, characterised by ambiguity and in certain cases, conflicting rulings.
In contrast with the socio-political context surrounding the US FTC’s proposed rule, it appears that while traces of a similar sentiment can indeed be identified across the EU, the issue does not seem be as critical so far.
It is, however, submitted that the rule which has been published by the US FTC may indeed have the effect of encouraging EU researchers in the field to look into this matter further, and in the event that increased EU-based research were to reveal the existence of abusive practices in this field for example, this may lead to a situation where the EU may decide to step in and legislate on the matter.
In any case, it is clear that the EU is monitoring the situation quite closely, and in a press conference held in February 2023, European Commissioner for Competition Margrethe Vestager noted that “the US has done quite an impressive work, they have made it a priority to look at labour market issues”, and that “we don’t see that many [in the EU]… if we did, we would definitely look into it”.
Concluding remarks
In the field of social policy, previous legislative intervention has shown that the EU often steps in as a response to certain trending issues which, in one way or another, have an impact on the world of work.
A number of trends, including the ongoing war for talent that most employers are currently facing, the vast labour shortages which are being reported all over the world, and the emergence of numerous new forms of work, will likely all contribute to the increased scrutiny of NCCs within the EU in the years to come.
Therefore, while the issue may currently not appear to be as pressing in the EU, if this matter were to continue gaining momentum across the EU, there is indeed a good chance that the EU will decide to step in and regulate this matter.
This article is a summarised version of the thesis submitted by Nina Fauser in partial fulfilment of the ‘Labour Law and Employment Relations’ LLM followed at Tilburg University, which was carried out following a scholarship and funding awarded under the Tertiary Education Scholarship Scheme (TESS).
This article was first published in the ‘Times of Malta’ on 04/08/2024.