The FTC has abandoned its pursuit of a blanket rule banning employer-employee non-compete agreements. The FTC's position on the Rule, however, does not signal movement away from non-compete enforcement which remains a priority at the agency.
On September 4, 2025, the FTC filed an enforcement action and simultaneous proposed consent order against a pet cremation company, alleging that non-competes imposed on almost all of the company's employees, regardless of skill level or job duties, constituted unfair methods of competition that violated Section 5 of the FTC Act. Read more about this enforcement action and others against non-competes below.
That same day, the FTC also launched a public inquiry on non-compete agreements "to gather information to inform possible future enforcement actions." Read more about this public inquiry below.
Less than a week later, on September 10, 2025, FTC Chair Andrew Ferguson announced that the FTC is "focusing resources on enforcing Section 5 of the FTC Act against unlawful noncompetes, particularly in the healthcare sector." The announcement stated that the FTC had sent letters to several large healthcare employers and staffing firms urging them to "conduct a comprehensive review" of their employment agreements, and if they contain noncompetes "that are unfair or anticompetitive" to discontinue them immediately and notify employees that they have been discontinued. Read more about these letters below.
Although antitrust enforcers' concern for anticompetitive effects in labor markets has been escalating for some time (read our 2022 article about labor market developments here), the focus on perceived anticompetitive effects of employer/employee non-compete provisions has recently become much more acute, including across the past several U.S. administrations.
Table of Contents
- US FTC Joint Labor Task Force
- US FTC and DOJ's 2025 Antitrust Guidelines for Business Activities Affecting Workers
- Vacated April 2024 US FTC Rule Banning Non-Competes
- Recent Wave of US FTC Enforcement Actions Against Worker Non-Compete Agreements
- Changes at the State Level: New York and California
- UK Proposes Stricter Approach to Non-Competes
- UK publishes research report on competition and market power in labor markets
US FTC's Joint Labor Task Force
On February 26, 2025, Federal Trade Commission Chair Andrew Ferguson issued a memorandum directing the heads of the FTC's Bureaus of Competition, Consumer Protection, and Economics as well as the Office of Policy Planning to form a Joint Labor Task Force.
The Task Force will prioritize the investigation and prosecution of deceptive, unfair, or anticompetitive conduct in the labor market and bring together expertise from across the agency to coordinate investigations and enforcement actions, such that this conduct is "fully prosecuted as a matter of consumer protection and competition law." Other Task Force responsibilities include identifying opportunities for advocacy on legislative or regulatory changes, promoting research and disseminating findings, and harmonizing investigation methods and procedures. With this directive, the FTC Chair expressly intends to "ensure that the FTC prioritizes labor issues in both its consumer-protection and competition matters."
The directive also called out a range of labor market issues that Chair Ferguson asserts fall under the FTC's jurisdiction and "trigger [the FTC's] mandates to fight unfair or deceptive practices and unfair methods of competition:"
- Non-competes which "impose unnecessary, onerous, and often lengthy restrictions on former employers' ability to take new jobs in the same industry after they leave their employment."
- Labor market termination penalties that "impos[e] unjustified fees when workers want to end their contracts."
- Employer-to-employer agreements that restrict labor mobility including no-poach, non-solicitation, and no-hire agreements, in addition to straight wage-fixing agreements.
- Labor market monopsonies, particularly in rural areas, where a firm uses "anticompetitive methods" to "create or maintain significant buyer power for labor."
- Collusion or unlawful coordination on DEI metrics that diminish competition for labor by excluding workers from jobs or professional-training schools based on race, sex, or sexual orientation.
- Harming gig economy workers through unfair or deceptive trade practices.
- Various deceptive practices based on false or misleading statements including deceptive job advertising that misrepresents salaries or perks to entice applicants, deceptive business opportunities which lure individuals into buying businesses with inflated or false claims about their worth and potential earnings, misleading franchise opportunities that lead workers or potential employers to invest savings in ways that never ultimately brings the benefits anticipated, and job scams including "online ‘task scams'" that trick individuals into performing tasks online, only to lose their money without receiving any compensation for completing the task.
- Harmful occupational licensing requirements, where employers or professional bodies impose unnecessary licensing restrictions which create an unwarranted barrier to entry or reduce labor mobility.
The Task Force will include 3 employees each from the FTC's Bureaus of Competition, Consumer Protection, and Economics and 1 employee from the Office of Policy Planning, who will meet at least monthly to discuss ongoing labor matters and provide quarterly reports on the status of those matters to Chair Ferguson.
US FTC and DOJ's 2025 Antitrust Guidelines for Business Activities Affecting Workers
On January 16, 2025, days before President Trump's second inauguration, the DOJ and FTC jointly issued Antitrust Guidelines for Business Activities Affecting Workers. The Guidelines are here. These new Guidelines replaced the 2016 Antitrust Guidance for Human Resource Professionals and identify agreements and business practices that may draw antitrust scrutiny from the enforcers.
How the 2025 Guidelines will ultimately inform the enforcement priorities of President Trump's antitrust agencies is uncertain. Both Republican commissioners, including the new FTC Chair Andrew Ferguson, dissented from the issuance of the Guidelines, writing that "the Biden-Harris FTC announcing its views on how to comply with the antitrust laws in the future is a senseless waste of Commission resources. The Biden-Harris FTC has no future." The Republican Commissioners' dissenting statement is here. Gail Slater, Trump's nominee to head the DOJ's Antitrust Division, has not expressed her views on the Guidelines.
Still, the new Guidelines continued to emphasize certain principles first set forth in the 2016 Guidance, which was approved with the support of both the Democratic and Republican FTC Commissioners at the time. In particular, the 2025 Guidelines carried over the 2016 Guidance on these practices:
- No-poach and wage-fixing agreements could still incur civil or criminal liability. The 2025 Guidelines, like the 2016 Guidance, warned that criminal or civil liability may attach to agreements between competitors for workers (i) not to hire, solicit, or otherwise compete for current, former, or potential workers, or (ii) about workers' salaries or other terms of compensation, either at a specific level or within a range. The Guidelines emphasize that the regulators will focus on the substance of such agreements rather than their "precise form." For example, the Guidelines states that an agreement not to "cold call" workers would still be considered a no-poach agreement subject to liability, even if these firms can hire competitors' workers who apply for a position without first being solicited.
- Sharing sensitive employment information with competitors could invoke civil antitrust liability if this exchange is likely to have an anticompetitive effect. The new Guidelines again cautioned firms against sharing sensitive employment information with competitors, including information about workers' compensation, benefits, or employment contract terms. These information exchanges may constitute antitrust violations if they have or are likely to have an anticompetitive effect, regardless of whether that effect was intended. In line with the antitrust regulators' push against algorithmic collusion generally, the Guidelines emphasize that providing this information through an algorithm or a third-party software may also be unlawful.
The 2025 Guidelines also identified new practices that may constitute antitrust violations:
- Non-compete agreements may face antitrust scrutiny, even in the absence of the FTC's Rule. The new Guidelines suggest that the antitrust enforcers may prosecute non-compete agreements that harm competition as antitrust violations, even if the Non-Compete Rule does not survive its pending legal challenges. In particular, the Guidelines state that the agencies "may investigate and take action against non-competes and other restraints on worker mobility that limit competition," either through case-by-case FTC enforcement actions (such as those described below) or DOJ prosecutions.
- Franchise no-poach agreements may violate the antitrust laws. The 2025 Guidelines state that agreements between either franchisor and franchisees or franchisees of the same franchisor not to poach, hire, or solicit each other's employees may violate the antitrust laws. Such agreements may also be per se illegal, meaning that liability could attach to these agreements even if they create no anticompetitive effects.
- Expansive NDAs, training repayment provisions, non-solicitation agreements, and liquidated damages provisions may be unlawful if they undermine competition. The new Guidelines vaguely state that the agencies may "investigate and take action against" any "restrictive, exclusionary, or predatory employment conditions" that "harm labor market competition by preventing workers from seeking better, higher-paying jobs," depending on the "facts and circumstances." The Guidelines provide a range of examples:
- Non-disclosure agreements that "span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their jobs," such as prohibiting disclosure of information "usable in" or that "relates to" an industry.
- Training repayment agreement provisions may be anticompetitive "if they function to prevent a worker from working for another firm or starting a business."
- Non-solicitation agreements that prohibit a worker from soliciting former clients of their employer can be anticompetitive "if they are so broad that they function to prevent a worker from seeking or accepting another job or starting a business."
- Exit fee and liquidated damages provisions that require workers to pay a financial penalty for leaving their jobs may be anticompetitive "if they prevent workers from working for another firm or starting a business."
- Agreements that apply to independent contractors are subject to the same antitrust principles. The 2025 Guidelines clarify that agreements that affect the labor mobility of independent contractors are subject to the same antitrust scrutiny as those that affect formal employees.
- Misleading or false earnings claims can constitute antitrust violations. The new Guidelines also warn against making false or misleading claims about potential earnings that workers may realize as an antitrust violation, since "honest businesses are less able to fairly compete for workers.
April 2024 US FTC Rule Banning Non-Competes – Vacated
On April 23, 2024, the U.S. Federal Trade Commission, under the Biden administration, voted 3-2 to finalize and promulgate a rule banning most non-compete clauses in employer-employee contracts. The FTC published the final rule in the Federal Register on May 7, 2024 and it was originally slated to go into effect on September 4, 2024.
The Rule would have prohibited employers from imposing non-competes and required employers to give notice that existing non-competes were no longer enforceable.
Legal challenges were swiftly lodged beginning just hours after the FTC's vote approving the rule, and on August 20, 2024, a federal court set aside the Rule and prohibited the FTC from enforcing it, the first of two such decisions. These orders applied nationwide, and the FTC moved to appeal them.
On September 5, 2025, the Federal Trade Commission voluntarily dismissed its appeals of these federal court rulings prohibiting enforcement of the Rule. In a statement on the withdrawal of the appeals, FTC Chair Andrew Ferguson characterized the Rule as legally unviable but affirmed that the Commission would "continue to enforce the antitrust laws aggressively against noncompete agreements." The federal appellate courts hearing the cases granted the dismissals. Now that the Rule no longer exists, enforcement and legal challenges of non-competes return legal and enforceable on the same terms as they were before the FTC passed the non-compete rule. As discussed below, non-compete enforcement remains a top priority of the FTC.
Recent Wave of US FTC Enforcement Actions Against Worker Non-Compete Agreements
Even though the Non-Compete Rule has abandoned its Non-Compete Rule, the FTC continues to target overbroad non-competes through enforcement actions under Section 5 of the FTC Act, which prohibits ''unfair or deceptive acts or practices in or affecting commerce.'' 15 U.S.C. § 45.
- On September 4, 2025, the FTC filed an enforcement action and simultaneous proposed consent order against a pet cremation company, alleging that non-competes imposed on almost all of the company's employees, regardless of skill level or job duties, constituted unfair methods of competition.
- According to the FTC's Complaint, almost all the company's employees were subject to non-competes that prohibited them from working in the pet cremation service industry anywhere in the U.S. for one year after the termination of their employment. The FTC alleges that these non-competes were applied "without any individualized consideration" of an employee's role and covered 1,780+ employees including highly compensated executives, hourly workers, facility-level laborers at cremation facilities, and customer service representatives. The FTC's Complaint is here.
- The FTC's proposed consent order includes a range of remedial actions against covered non-competes, including requirements that the company:
- Stop entering, maintaining, enforcing, or threatening to enforce covered non-competes.
- Stop communicating to employees or their prospective or current employers that the employee is subject to a non-compete.
- Not prohibit the employee from soliciting current or prospective customers, except those customers with whom the employee has had direct contact or personally provided service within the preceding 12 months.
- Provide specific notices to each covered employee regarding the inapplicability of their non-competes.
- Submit to the FTC acknowledgements from directors, officers, and human resources employees (including those who become directors, officers or human resources employees in the next 10 years) of the complaint and consent order as well as regular compliance reports for a period of 10 years.
- The full range of obligations is listed in the FTC's proposed consent order, which is here.
- The FTC's proposed consent order still allows the company to enter into non-competes (1) "with a director, officer, or senior employee, in conjunction with the grant of equity or equity-based interests" or (2) in the context of a sale-of-business transaction, so long as the person subject to the non-compete has a preexisting equity interest in the business being sold. The proposed consent order also excepted certain named individuals against whom non-competes were justified to protect legitimate business interests (such as equity holders, very senior managers, or others who have more unique access to competitively sensitive information).
- The proposed consent order also allows the company to continue enforcing agreements "that prevent solicitations of employees and customers for a period of time, to the degree that those restrictions comply with the law, or that prevent current or former employees from using or disclosing Gateway's confidential business information and trade secrets."
On the same day it filed this enforcement action, the FTC also launched a public inquiry regarding non-competes "to gather information to inform possible future enforcement action."
- Through this inquiry, the Commission "seeks to understand which specific employers continue to impose noncompete agreements" and encouraged "current and former employees restricted by noncompete agreements, employers facing hiring difficulties due to a rival's noncompete agreements, and market participants in the healthcare sector in particular, to share information about the use of noncompete agreements."
- The inquiry asks the public for names of employers using non-competes, information on persons bound by non-competes, justifications advanced for non-competes, and harms imposed by non-competes on workers, among other questions. The FTC's requests for information regarding non-competes are available here.
Just a few days after taking these actions, on September 10, 2025, FTC Chair Andrew Ferguson announced that the FTC is "focusing resources on enforcing Section 5 of the FTC Act against unlawful noncompetes, particularly in the healthcare sector." The announcement stated that the FTC had sent letters to several large healthcare employers and staffing firms urging them to "conduct a comprehensive review" of their employment agreements, and if they contain noncompetes "that are unfair or anticompetitive" to discontinue them immediately and notify employees that they have been discontinued.
- The FTC's letters express particular concern for overly restrictive non-competes against healthcare workers, noting that non-competes "may have particularly harmful effects in healthcare markets where they can restrict patients' choices of who provides their medical care—including, critically, in rural areas where medical services are already stretched thin." The FTC's template letter sent to healthcare employers is here.
- The letters prompt employers to consider whether their non-competes are "necessary and appropriate under the circumstances, including whether less restrictive alternative contract terms may sufficiently achieve the same procompetitive purposes. For example, noncompetes may be overbroad in duration or geographic scope. Or they may be inappropriate for certain roles entirely."
- In an accompanying press release, FTC officials reaffirmed the agency's commitment to pursuing enforcement actions against firms that impose overly restrictive employment covenants across the board. Kelse Moen, Deputy Director of the Bureau of Competition and co-chair of the agency's Joint Labor Task Force, commented, "Enforcement against unreasonable noncompete agreements remains a top priority for the Federal Trade Commission." Moen also "strongly encourage[d] all employers—not just those receiving letters today—to review their contracts closely, to ensure that any restrictions on employee mobility are in full compliance with the law." The FTC's press release is here.
And earlier, the FTC's initial proposed Non-Compete Rule came within 24 hours of the FTC signaling its intention to achieve its anti-non-compete clause views through enforcement.
- On January 4, 2023, the FTC announced that it had filed suits—for the first time—to stop companies from enforcing non-compete restrictions. The FTC's press release is here.
- The suits involved three companies with non-competes for a range of workers, including low-wage workers, which lasted for one to two years. As a result of the suits, the companies were ordered not to enforce the non-competes, as well as put other remedies into place, such as providing notice for the next 10 years to employees that they may freely seek any job following their employment.
- In these actions, the FTC sued under Section 5 of the FTC Act, which governs unfair methods of competition. The FTC argued that the non-competes harmed employees because they result in lower wages, lower salaries, and less favorable working conditions. The FTC also argued that the non-competes harmed new competitors in the glass food and beverage containers industry, noting that the non-competes would impede entry and expansion of new competitors in a concentrated market.
- On March 15, 2023, the FTC ordered another glass container company to drop non-compete restrictions on more than 300 workers across a variety of positions, again arguing that the non-competes harmed workers and competition in the industry. The FTC's press release is here.
- The FTC and Department of Labor (DOL) signaled that more non-compete enforcement actions were on the horizon in August 2023, when the FTC and DOL signed a Memorandum of Understanding that sets out coordination in investigations and sharing of information between the DOL and FTC related to labor and competition issues. The Memorandum of Understanding is here.
- According to the FTC, "the MOU identifies areas of mutual interest for the two agencies: collusive behavior; the use of business models designed to evade legal accountability, such as the misclassification of employees; illegal claims and disclosures about earnings and costs associated with work; the imposition of one-sided and restrictive contract provisions, such as non-compete and training repayment agreement provisions; the extent and impact of labor market concentration; and the impact of algorithmic decision-making on workers" (emphasis added). The FTC's press release is here.
The FTC's rulemaking and enforcement actions were also in line with the FTC's November 2022 policy statement announcing that the FTC would invoke Section 5 to challenge conduct beyond that covered by the Sherman Act.
Changes at the State Level: New York and California
State legislatures have also shown a growing interest in new proposals to ban or limit non-compete agreements.
New York renewed non-compete ban proposal. In June 2023, the New York State Legislature passed a bill that would have prohibited almost all new non-competes in New York and created a private right of action enabling workers to void their non-competes and recover up to $10,000 in liquidated damages, in addition to lost compensation, damages, and reasonable attorneys' fees and costs. Though the legislature passed the 2023 bill, Governor Kathy Hochul vetoed it, calling for a carveout to the ban for higher-wage workers. The bill's sponsor, State Senator Sean Ryan committed to proposing similar legislation in the future and made good on that promise when he introduced Senate Bill 4641 on February 10, 2025 which includes the carveout Governor Hochul called for.
What are the key features of New York's 2025 bill?
- The bill adds a new section to New York State Labor Law that would prohibit any employer from seeking, requiring, demanding, or accepting a non-compete agreement from any covered individual. Section 191-d(2).
- Covered individuals include "any person other than a highly compensated individual who, whether or not employed under a contract of employment, performs or has performed work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person." Section 191-d(1)(b). Accordingly, the law not only applies to formal employees but also may extend to independent contractors and others working under informal arrangements.
- If enacted into law, employers must conspicuously post a notice informing employees of the law's non-compete protections. New York's Department of Labor will develop and provide this notice for employers to distribute to their workforces. Section 191-d(9),
- The bill expressly exempts agreements that (1) establish "a fixed term of service," (2) prohibit disclosure of "trade secrets" and "confidential and proprietary client information," and (3) prohibit "solicitation of clients of the employer that the covered individual learned about during employment," provided that such agreement does not otherwise restrict competition. Section 191-d(4).
How does the Highly Compensated Individual exception work?
- Non-competes imposed on workers who are "compensated an average annualized rate of cash compensation determined by the income listed on the individual's three most recent W-2 statements and, where applicable, K-1 statements" equal to or greater than $500,000 are not banned under the law, so long as those workers are not health care professionals or non-management broadcast industry employees. Section 191-d(1)(c); see also Sections 191-d(1)(d), 191-d(2) (defining health care professionals separately from covered individuals and prohibiting non-competes against both); Section 191-d(5) (retaining restrictions on non-competes imposed against non-management broadcast industry employees).
- Highly Compensated Individuals subject to non-competes are entitled to salary payments for the period of the non-compete, which cannot apply for longer than a year. Section 191-d(7)(b). Additionally, these non-competes still must (1) be reasonable in time, geography, and scope, (2) not pose undue burden on the employee or harm to the public, and (3) be no more restrictive than necessary to protect an employer's legitimate business interests. Section 191-d(7)(a).
- The compensation level governing the exception under the bill will be adjusted on an annual basis beginning in 2027, based on any increase in the Consumer Price Index for all urban consumers for New York State. Section 191-d(1)(c).
Are there any other exceptions proposed under the bill?
- The bill also includes a sale-of-business exception such that non-competes entered in the sale of a business's goodwill or a majority ownership interest remain enforceable so long as (1) the seller owns at least 15% of the business, or (2) the seller is a partner of a partnership or a member of a LLC who owns at least 15% of that partnership or LLC. Section 191-d(6).
If enacted, what happens when you violate the law?
- The bill creates a private right of action such that a worker subject to a prohibited non-compete can sue to void its terms and receive payment for liquidated damages, lost compensation, damages, and reasonable attorneys' fees and costs. Section 191-d(3)(a). Additionally, the bill provides that courts "shall award liquidated damages" of not more than $10,000 "to every covered individual affected under this Section, in addition to any other remedies permitted by this Section." Section 191-d(3)(b).
- Such actions can be brought "within two years of the later of: (1) when the prohibited non-compete agreement was signed; (2) when the covered individual learns of the prohibited non-compete; (3) when the employment or contractual relationship is terminated; or (4) when the employer takes any step to enforce the non-compete agreement." Section 191-d(4)(a).
When would the law become effective?
- The law would become effective 30 days after being signed into law by Governor Kathy Hochul and will be applicable contracts entered into or modified on or after that date.
How does the NY bill differ from the FTC's proposed rule?
- New York's bill would not apply retroactively, unlike the FTC's proposed rule. New York's bill would only be applicable to contracts entered into or modified on or after its effective date, whereas the FTC's proposed rule would apply to pre-existing non-competes and require employers to proactively rescind their non-competes.
- Though the FTC's proposed rule would supersede inconsistent state law, the proposed rule also provides that any state law that affords a worker protection "greater than the protection provided" under the rule will not be pre-empted. (Proposed Rule § 910.4 is here.) Since the NY bill's damages provisions grant enhanced protections, it is likely to survive the proposed rule's implementation.
California strengthens its non-compete ban. California's new non-compete laws went into effect on January 1, 2024, bolstering the state's existing protections against non-competes. Though most non-compete clauses have been void in California since 1872, California's newly enacted AB-1076 and SB-699 create additional bars to enforcing non-competes in the state. SB-699, signed into law in September 2023, expands the reach of California's non-compete ban to contracts signed outside the state and creates a new private right of action for workers to sue employers who enter into or attempt to enforce a non-compete. AB-1076, enacted just a month later, codifies California Supreme Court precedent which made including a non-compete clause in an employment contract or requiring an employee to enter a non-compete unlawful unless an exception applied. AB-1076 also requires that California employers notify employees who are subject to unlawful non-competes that their non-competes are void by February 14, 2024.
- What are the key features of the California laws?
- SB-699 makes most non-competes unenforceable in California, "regardless of where and when the contract was signed." Section 2(a). The law also prohibits employers and former employers from attempting to enforce a non-compete, even if "the employment was maintained outside of California." Section 2(b). The law could prevent out-of-state employers from enforcing non-competes against employees who leave to work at California companies.
- Under SB-699, an employer that enters into a prohibited non-compete commits a civil violation that can be enforced through a new private right of action which enables a current, former, or prospective employee to sue for injunctive relief and actual damages as well as reasonable attorney's fees and costs. Section 2(e)(1)-(2).
- AB-1076 codifies California Supreme Court precedent in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (Cal. 2008), which clarified that any non-compete that falls outside the scope of California's preexisting exceptions is void, regardless of how narrowly tailored the non-compete is. Section 1.
- AB-1076 also provides that California employers must notify both current employees and former employees employed after January 1, 2022 who are subject to unlawful non-competes that their non-competes are void. Section 3(b)(1). Written notice must be provided to these employees by February 14, 2024, and failure to provide such notice constitutes an act of unfair competition subject to a $2,500 penalty per violation. Section 2(b)(2), 2(c).
- Do the California laws apply to all non-competes?
- No. California allows non-competes in the context of the sale of a business, the dissolution of a partnership, or upon the dissolution or termination of interests in a limited liability company, so those agreements will remain outside the scope of these laws. Cal. Bus. & Prof. Code Sections 16601, 16602, 16602.5.
- How does the California law differ from the FTC's rule?
- The FTC’s rule covers less non-competes than California's ban. The FTC's rule contains the above-described exception for existing non-competes imposed on senior executives, while California's ban has no similar exception. Additionally, though California's ban also exempts certain sale-of-business agreements, this exception under California law has a narrower scope and only allows non-competes against business owners who sell (i) the goodwill of a business, (ii) all of their ownership in a business entity; or (iii) all or substantially all of the assets of a business together with the goodwill of that business. Cal. Bus. & Prof. Code Section 16601.
UK Proposed Stricter Approach to Non-Competes
In a policy paper on "Smarter Regulation to Grow the Economy," the UK government has announced proposals to limit the duration of non-compete clauses in employment contracts to three months.
This proposal reflects the growing concern worldwide concerning the use of non-competes. As discussed above, earlier this year, the U.S. FTC took even more extreme action than the UK, by publishing a proposed rule to ban non-compete clauses completely.
- What is the approach to non-competes in the UK?
- There are currently no statutory restrictions on non-compete provisions in the UK.
- Under case law, non-competes will only be enforceable if they are no wider than reasonably necessary to protect a legitimate interest (e.g. protection of confidential information or customer contacts) and are not contrary to the public interest.
- The UK courts have in the past enforced up to 12 month non-competes in employment contracts in certain sectors, particularly in case of non-competes imposed on founders or senior management. In other contexts, including partnership agreements and shareholder agreements, non-competes that apply for a longer duration have been enforced by the UK courts.
- What are the proposals?
- The UK government proposes to limit the duration of post-termination non-compete clauses in employment contracts to three months.
- The three month limit will only apply to non-competes in contracts of employment and the contracts of certain other workers who benefit from certain protections under UK employment law. The UK government does not propose to apply the limit to wider workplace contracts, such as partnership or shareholder agreements. This is on the basis that there are fundamental differences in the balance of bargaining power with these wider workplace contracts. Based on the consultation document, it appears that equity incentive documents, such as employee share option agreements, would be considered a wider workplace contract as well.
- There are carve-outs. The proposal will not limit or interfere with the employer's use of:
- non-solicitation clauses;
- paid notice periods or gardening leave; or
- confidentiality clauses.
- The proposal also will not affect the restrictions on former UK public sector employees under the UK business appointment rules.
- The proposal follows a consultation period between 4 December 2020 and 26 February 2021 that explored and ultimately rejected the following two alternatives:
- the complete prohibition of post-termination non-compete clauses; and
- making post-termination non-compete clauses permissible only when the employer provides compensation for the period of restraint.
- The UK government estimates that there are around 5 million employees subject to non-compete clauses in Great Britain and that a typical duration is around 6 months.
- Whilst recognising that non-compete clauses "can play an important role in protecting businesses who invest in their staff", the proposal claims that, "unnecessarily burdensome clauses have become a default part of too many employment contracts, including where they fulfil no purpose." The proposal states that non-compete clauses "can inhibit workers from looking for better paying roles, and limit the ability of businesses to compete and innovate".
- The proposal's stated aims are to give "UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise."They also aim to "provide a boost to the wider UK economy, supporting employers to grow their businesses and increase productivity by widening the talent pool, and improving the quality of candidates they can hire."
- Why no complete ban on non-competes?
- In contrast to the US FTC's proposal, the UK government has ruled out a complete ban of non-competes. Following a review of "available evidence, research, and literature", the UK government considers that the risks and potential for unintended consequences could outweigh the potential benefits of a complete ban. While the UK government recognises that a complete ban could have "a positive effect on competition and innovation", it considers that "there is some evidence to suggest that in certain circumstances, non-compete clauses can act as a mechanism to align incentives between workers and employers, and enable investments."
- What should employers do?
- Employers should start to consider other ways they can protect their business interests once the proposed limit comes into force.
- In the UK, the most robust way of protecting an employer's business interests in an employment contract of a senior employee who holds valuable trade secrets is a long notice period combined with an express garden leave clause. A 12 month notice period is fairly typical for a C-suite executive.
- Where a long notice period is not appropriate or cannot be agreed, then employers may consider including non-competes in wider workplace contracts. In particular, if equity incentive documents will ultimately be considered a "wider workplace contract" under the final legislation, then granting an option or other equity interest which includes a carefully drafted (and longer) non-compete in its terms might well be a sensible and enforceable alternative.
- What is the proposed timetable?
- The proposal states that the UK government intends to legislate "when parliamentary time allows." There is currently no clarity as to whether, if legislation does pass in this area, it will apply retroactively to existing employment contracts and contracts with workers and if so, whether pre-existing non-competes that apply for longer than 3 months will only be enforceable for 3 months after termination, or whether such non-competes will be unenforceable and void in their entirety.
UK publishes research report on competition and market power in labor markets
On 25 January 2024, the UK's Competition and Markets Authority (the CMA) published a research report on competition and market power in labour markets.
What is the report on "Competition and market power in UK labor markets"?
- The Report is the first "flagship" research study published by the CMA's Microeconomics Unit, which was recently established to conduct economic research focussed on issues of competition, innovation, and productivity to support growth in the UK economy. The Microeconomics Unit has been set up as an independent and open-access centre of microeconomic research expertise for the UK government as a whole, and so the Report is aimed not just to inform the CMA's work, but also to be of wider policy interest.
- The Report examines employer market power and labor market concentration, the prevalence of restrictive covenants (including non-compete clauses), as well as changes in the labor market, including hybrid and flexible working and the gig economy, which features an increased amount of temporary positions and freelance work. The CMA is planning to use the findings to inform its current increasing scrutiny of potentially anti-competitive conduct in labor markets, as well as broader government and policy thinking.
What does the report say about non-compete clauses in UK employment contracts?
The Report finds evidence that post-termination non-compete clauses in employment contracts (preventing an employee from working at a competitor for a prescribed amount of time after they leave their current employer) are common in the UK.
According to the research:
- Non-compete clauses impact around:
- 26% of workers in the UK;
- 40% of UK workers in information and communication technologies and professional and scientific services; and
- 20% of UK workers in retail, education, and food services.
- The most common duration of UK non-competes is 6 months, applied by 43% of employers who use non-competes. About 33% of employers who use non-competes include year-long clauses.
CMA chief executive Sarah Cardell questions specifically in her published speech (accompanying the Report) the high number of non-competes prevalent for the lowest-paid workers. She notes that, while non-competes are typically justified on the basis of enabling investment to develop workers (through training/sharing confidential information), "we might expect to see non-competes only in particular industries or groups of workers where this sort of investment is happening". The use of non-competes for rank and file workers at fast food chains throughout the U.S. has been a focus of enforcement actions by state enforcers and the U.S. DOJ especially since 2016.
What are the implications of the Report?
- The Report's findings (specifically the findings that well-functioning labor markets benefit workers and the economy more generally) will bolster the CMA's determination to ensure that businesses do not restrict competition between them in labor markets, through for example no-poach and wage-fixing agreements.
- Employee non-competes usually fall outside the scope of UK antitrust law, but are governed by employment law. The UK is currently planning to legislate to limit post-term non-competes to 3 months in the UK (as explained above). In her accompanying speech, Sarah Cardell states that the evidence in the Report "supports this direction of travel", and comments that "the widespread prevalence of non-competes across the economy could act as a barrier to job switching."
- Highlighting the possible need for further education, it is interesting that the Report notes that 40 per cent of respondents to the "Business Insights and Conditions Survey", with 250+ employees, stated that they were "not sure" what types of restrictive covenant they use in their employment contracts.
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