The FTC’s Proposed Ban on Noncompete Agreements: What Should Employers Do?

A 200-year-old mainstay of many employment agreements could soon be a thing of the past.

In January, The Federal Trade Commission proposed a sweeping, national ban on noncompete agreements, which allow employers to bar employees from taking jobs with competing companies during their employment and for a certain time period after their employment ends. The move, which is still in the proposal phase, comes as the FTC has made a preliminary determination that noncompetes constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act.¹

It’s estimated that more than 30 million workers — or roughly 18% of the U.S. workforce — are required to sign a noncompete before accepting a job.²

If the rule is adopted as proposed, employers of all sizes – for-profit or non-profit – will no longer be able to impose noncompetes on their workers (including independent contractors, externs, interns, volunteers, or apprentices), regardless of their salary level. And it would apply retroactively, making existing noncompete agreements unenforceable.

Specifically, the proposed rule would ban entering into, attempting to enter into, or maintaining a noncompete with a worker, or committing a worker to a noncompete under certain circumstances. The only exceptions: noncompete clauses could still be used in the sale of a business, between seller and buyer, when the restricted party is a “substantial owner” in the business being sold, holding at least 25% ownership. The proposed rule also allows noncompetes to continue to be used in agreements between franchisors and franchisees. Other types of employment restrictions, such as non-disclosure agreements, will also still be allowed.

The FTC may end up narrowing the application of the proposed rule to a subset of workers based on such factors as occupation, function, or wages. This narrower prohibition may allow noncompetes for a limited number of high-wage workers while banning them for low-wage employees.

If, however, the proposed rule passes, employers would be required to come into compliance 180 days after the final rule is published, rescind existing noncompete provisions by the compliance date, and notify all impacted workers within 45 days of that date.

Pros and cons

Opponents of the ban say the proposal is too broad and the agency exceeded its authority. Some argue that the proposal also fails to address employers’ legitimate concerns about protecting their training and proprietary information as employees move to other jobs. When appropriately used, they say, noncompete agreements are an important tool in fostering innovation and preserving competition.

Proponents of the proposal welcome the move to increase wages and promote economic development in states that don’t already limit or ban noncompetes. The FTC says that ending noncompetes could increase wages by nearly $300 billion per year and expand career opportunities for 30 million workers. According to FTC Chair Lina M. Khan, “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions and depriving businesses of a talent pool that they need to build and expand.” Further, many members of the public have supported the rule proposal, several of whom have commented favorably during the public comment period which ends on April 19, 2023.³

Given the variables and complex nature of these proposed actions, it would be wise for employers to review their practices and options with experienced employment lawyers, as discussed below.

Employers need to be prepared

Although the proposal has yet to take effect, and may be modified in the interim, employers can act now by:

• Conducting a noncompete “audit” – including analyzing the breadth of confidentiality and nonsolicitation clauses and tightening up trade secret protection plans. This is the best way to protect against legal risk and avoid either under- or over-reacting to the FTC’s action.
• Deciding whether a “full” noncompete clause is needed or whether a confidentiality, nonsolicitation, or nondisclosure agreement – which courts tend to view more favorably than straight noncompetes – might be sufficient to protect legitimate competitive interests. Agreements with employees should be reasonable and narrowly focused to protect trade secrets and confidential information, as opposed to including provisions that simply keep an employee from working.
• Taking advantage of the FTC's comment period (which ends on April 19) and letting their voices be heard if the proposed law would do harm to their legitimate business interests.

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  1. See https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition ^↩
  2. White House, Fact Sheet: Executive Order on Promoting Competition in the American Economy (July 9, 2021) ^↩
  3. https://www.regulations.gov/docket/FTC-2023-0007/comments?pageNumber=2 ^↩

Employer Alert: New NYC Pay Transparency Laws Are (Finally) Coming

It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.

Don’t worry about sounding professional. Sound like you. There are over 1.5 billion websites out there, but your story is what’s going to separate this one from the rest. If you read the words back and don’t hear your own voice in your head, that’s a good sign you still have more work to do.

Be clear, be confident and don’t overthink it. The beauty of your story is that it’s going to continue to evolve and your site can evolve with it. Your goal should be to make it feel right for right now. Later will take care of itself. It always does.

New York City companies with four or more employees will soon be subject to two new and similar pay transparency laws designed to change unfair compensation practices. To be subject to the law, all four workers need not be located in New York City; the law applies if only one position is based in the city.

The city law is set to go into effect November 1, 2022. The state law is expected to be signed by Gov. Hochul soon and would go into effect 270 days after its signing.

In a nutshell

Principally, these laws require the disclosure of compensation information in advertisements for jobs, promotions, or transfers. The definition of “advertisement” in the city law is broad, covering everything from internal and external email blasts to ads on LinkedIn or Indeed, classified ads in print, postings on internal bulletin boards, and flyers handed out at job fairs.

The laws require disclosure of the actual salary, a minimum and maximum starting salary, or hourly wages that the employer believes to be accurate at the time of posting (postings are not required to include overtime, vacation, medical insurance, commissions, tips, bonuses or stock).

Notably, the salary range cannot be open-ended — a posting for a job paying “$15 per hour and up” or “maximum $50,000 per year” would run afoul of the laws.  And under the state law, employers will be required to keep records, which may include a history of compensation ranges in the company and any job description for each opportunity.

Employers who violate these rules may be subject to civil penalties and possible damages to aggrieved workers. Under the city law, employers have one chance to correct a job posting error. After that, violations may cost up to $250,000. Under the current version of the state law, civil penalties would start at $1,000 and up to $3,000 for repeat violations.

Getting smart

As these laws go into effect — along with similar laws in other states — local and multi-state employers should review and audit their current pay levels, policies, practices, job descriptions, and postings for new hires, transfers, and promotions. Any personnel involved in hiring, transferring, or promoting employees, or in drafting and posting advertisements, must be familiar with these new requirements.

The new laws come on the heels of New York City’s 2017 salary-history legislation that made it illegal for employers or employment agencies to ask applicants about their salary history or rely on applicants’ salary history to determine salary, benefits, or other compensation during the hiring process.  

In short, employers keeping pay information close to the vest is a thing of the past; they must now put their cards on the table to help ensure that similarly situated employees engaged in the same or similar work receive comparable pay.

We urge employers to understand the details of these laws, raise questions as needed, and keep their ears to the ground for new pay transparency developments in the days ahead. Inevitably, test cases will be forthcoming. Complaints under the city law will be adjudicated before the New York City Commission on Human Rights and, assuming the state law passes, disputes under it will be heard by the New York State Department of Labor.

Workplace in the Age of COVID

Obviously, the COVID-19 pandemic has reshaped the world. Everything from travel to exercise is different now. It has also had a major impact on employment law. Basic concepts — like the meaning of “workplace” — have been transformed. And while the pandemic may subside, many changes are likely permanent. Accordingly, employers should consider rethinking their employment practices and revising their policies.

The major driver of change has been the transformation of the “office” from a physical space to a remote environment knit together by Zoom, WebEx, etc. While this shift might obviate some workplace concerns, it makes others more challenging.

For example, take the fraught issue of worker classification; i.e., whether a worker is properly classified as an employee or an independent contractor. An employer may think that, since certain workers are fully remote, the company is more likely to get away with classifying them as independent contractors. But the U.S. Department of Labor will still analyze whether the work is subject to sufficient company control and, if so, may determine that the workers should still be classified as employees, even if using their own personal laptop. Employers must remain mindful of their workers’ work conditions, including the nature and extent of the supervision they receive, which is challenging in a non-office setting.

Remote work has also created new problems. For example, while an employer may be located in one city or state, the laws of different jurisdictions may cover the company’s remote workers (and the terms and conditions of their employment), depending on where the workers are located. Such laws can cover anything from wage-and-hour requirements to rest breaks, taxation, workplace safety, accommodation (and definition) of disability, benefits, and more.

Working remotely also introduces new concerns regarding workplace safety and security. What if employees injure themselves during the remote workday? Is the employer liable for an unsafe workplace? How does a company ensure data security when employees are logged in from multiple locations, with varying degrees of security protections?

Additionally, while it may seem that the remote environment reduces potential problems involving discrimination and sexual harassment, new concerns arise. For example, an employee’s home background during a Zoom call may reveal a religious symbol, books on a controversial topic, or children heard in the background. A terminated employee may claim the employer was motivated by what a supervisor saw or heard on camera. Or a colleague might claim that the books were offensive or created a hostile work environment. Of course, the means of sexual harassment via remote technology are nearly limitless. While allegations of discrimination and harassment are still assessed by the same legal rules and standards, remote work provides new ways for employers to find themselves in legal hot water.

The key to addressing these issues is the same as it was before: clear workplace policies.  

Employer workplace policies must be updated to account for remote work and the unique challenges it brings. Clear policies not only help employees navigate tricky situations in the workplace, but they protect employers from potential liability. In many cases, whether an employer will be found liable for an employee’s workplace misconduct depends on whether the employer has policies in place prohibiting the misconduct, has clear guidelines for making complaints if such misconduct occurs, and takes appropriate steps as soon as it becomes aware of misconduct.

The legal issues raised by remote work are complex and fluid. Some are old issues with a new dimension; some are entirely new. Companies should review them with an attorney. One thing is for sure: remote work isn’t going anywhere. By adapting to these new circumstances, employers can minimize the risks and maximize the benefits of the brave new world of working — and managing — remotely.

When “Fake it till You Make it” is Fraud

Fake it till you make it. People invoke this cliché all the time when . . . well . . . faking it. The saying actually has honest, well-intentioned roots in accepted psychology and methods for boosting self-confidence. But when this approach is re-purposed for use in business pitches — as self-starters across innumerable industries do every day — “faking it” can result in a fraud lawsuit, notwithstanding that no harm is intended. Indeed, civil liability for fraud may arise from a New York legal doctrine dating back to a 1931 decision by Judge Cardozo. Entrepreneurs looking to avoid the risk of an early, business-killing lawsuit should take heed.

Psychologists have long observed that a person lacking a desired character trait — confidence, for example — can simply pretend to possess that quality and, in time, actually develop it. As the American philosopher and psychologist William James wrote in his 1922 work The Gospel of Relaxation: “the sovereign voluntary path to cheerfulness, if our spontaneous cheerfulness be lost, is to sit up cheerfully, to look round cheerfully, and to act and speak as if cheerfulness were already there. . . . So to feel brave, act as if we were brave, use all our will to that end, and a courage-fit will very likely replace the fit of fear.” 

Status-enhancement theory posits that people may attain influence — in business and the workplace, for example — by acting confident and assertive, since we tend to equate those traits with competence. Whether trying to get a dream job, a great freelance contract, or a new customer or client, conveying confidence is key. As one academic observed: “Needless to say, this way of communicating is the bread and butter of salespeople, politicians, and other presumed experts who tout products, ideas, and themselves. Supreme belief in your product is the foundation of successful sales.”

Courts generally see no problem with this, and lawsuits based on unfulfilled sales-pitch claims of being the “greatest” or “world class” are routinely dismissed. Judges see such “boastful,” “optimistic,” or “hopeful” statements as mere “puffery” or “sales talk.” ^[i] As the Second Circuit Court of Appeals has noted: “It can be expected that any professional will convey to potential clients a healthy self-estimation.” ^[ii] Indeed, the law recognizes that self-promoting statements like this are just part of our competitive economy. In many ways, putting on a confident show while getting your business up and running — faking it till you make it — is as American as apple pie.

But some aggressive self-starters have abused this benign concept, taking it as license to convey not just an aura of general confidence, but something troubling: an ability to do a specific job that, in reality, they’re not really sure how to do. Of course, they may mean no harm, and they may really believe they’ll deliver in the end. But unbeknownst to the potential client during the sales pitch, the plan is to “figure it out on the fly.” The problem is, if the deal goes south, liability in fraud may result.

As relevant here, common law fraud in New York generally involves a false representation of material fact, made with the intent to deceive and to induce another person to act in reliance on it, that causes damages. To be fraudulent, the misrepresentation must be more than mere puffery or an expression of optimism or hope for the future — it must be a statement of present fact, meaning that its misleading nature can be verified at the time it is made. ^[iii]

Can “fake it till you make it” entrepreneurs — even while aiming to deliver as promised — really have the fraudulent intent necessary to give rise to a fraud claim? Can their exaggerated claims of know-how and skill really be considered statements of concrete, then-present fact, as opposed to mere optimism or puffery? The short answer is yes. 

The starting point is a 1931 holding by Judge Cardozo (then on the New York Court of Appeals) in Ultramares Corp. v. Touche: “Fraud includes the pretense of knowledge when knowledge there is none.” ^[iv] The idea is that one can make a fraudulent misrepresentation without even knowing the statement to be false if, uncertain as to its truth or falsity, he pretends to know for certain it’s true. ^[v] Such a statement “is equally fraudulent as though intentionally falsely made.” ^[vi] When a statement made with the “pretense of knowledge” is intended to deceive another person into acting in reliance on it, the required fraudulent intent is present.

A 2004 Southern District case demonstrates that, even where a service-provider desperately wants to deliver as promised and please the client, fraudulent intent may be found if, when he pitched for the business, he gained the client’s trust via pretense. In EED Holdings v. Palmer Johnson Acquisition Corp., Judge Sweet upheld fraud claims against the owner of a struggling yacht-building company who sought to save his business by convincing a potential buyer to put in a $10 million order. During the sales pitch, he stated not only that his company built “the greatest boats” and that he would be personally “committed” to the project (both nonactionable puffery), but also that his company “had the capability and wherewithal to properly construct” the yacht. That statement was actionable as fraud because, at the moment he made that statement, the owner had reason to doubt his business’s operational abilities, knew that it was perhaps not up to the task, and concealed that uncertainty from the client. ^[vii]

Let’s consider a “fake it till you make it” case that Parker Pohl filed. Our client was a healthcare provider that needed to overhaul its billing processes to comply with regulatory changes. The task was complex, and our client sought to outsource it. They entered talks with a billing vendor which, during its sales pitches, said all the right things about its resources and know-how. In particular, it stated, with apparent certainty, that it had personnel who understood the new requirements, knew how to process the billings, and were otherwise equipped to get the job done. Our client relied on those assurances and hired the vendor. Massive problems ensued and millions of dollars in receivables were lost due, we claimed, to the vendor’s incompetence. We alleged that the vendor had defrauded our client because, at the moment the vendor gave assurances of ability, it actually had no idea whether it had the ability to do the job or not; in those sales pitches, the vendor had faked it to get the lucrative business, planning to “figure it out later.”

This, we alleged (and rightly so), made out a fraud claim, even though the vendor never wanted to lose a penny of our client’s money and had no intent to harm whatsoever. The reason is that common law fraud does not require the intent to harm — it requires something different: the intent to deceive. In “fake it till you make it” fraud, while the entrepreneur may not be seeking to harm anyone, he is clearly intending to deceive — he’s seeking to gain the potential client’s trust based on sales-pitch misrepresentations of ability and know-how. In our case (as alleged), the vendor, when it recklessly assured our client it could do something without knowing that to be true, intended to deceive our client into doing something that, had our client known the truth, it never would have done: give the vendor the job. 

Thus, “fake it till you make it” fraud may arise when, during the sales pitch, the self-starter is subjectively uncertain as to whether she can actually do the job she claims she can do — with the plan being to get the business and figure it out on the fly. This concealed uncertainty can lead to fraud liability, as in EED Holdings, notwithstanding the entrepreneur’s sincere desire to deliver as promised. 

“Faking it” is a perilous approach. And it all comes back to Justice Cardozo’s 1931 gem: “Fraud includes the pretense of knowledge when knowledge there is none.” Entrepreneurs and self-starters can fake it all they want when it comes to general confidence, assertiveness, and optimism — knock yourselves out. But “fake it till you make it” is not license to deceive clients or customers into believing you’re equipped to perform a job that you’re actually not sure how to do. If your aggressive sales pitch crosses the line from the former to the latter and you end up botching the job, you may find yourself in court, before a jury that will decide whether, despite your outward display, you were uncertain within. 

So, entrepreneurs and self-starters, be careful. A reputation for fraud is hard to overcome.