EMPLOYERS BEWARE OF PROPOSED RULE THAT MAY IMPACT NON-COMPETE COVENANTS AND LOCAL LEGISLATION THAT SEEKS TO CURTAIL UNPAID INTERNSHIPS

A. The Federal Trade Commission (FTC) proposes rule to ban non-compete covenants and/or agreements

Earlier this month the FTC published for public opinion a new proposed rule to ban employers from requiring non-compete clauses from their workers. The proposed rule is based on findings that a non-compete clause constitutes an unfair method of competition and therefore violates Section 5 of the Federal Trade Commission Act. Also, the FTC estimates that banning this practice could increase wages by nearly $300 billion per year and expand career opportunities for nearly 30 million Americans.

A non-compete clause is a contractual agreement aimed to impede an employee from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the termination of the worker’s employment. To be valid in Puerto Rico, non-compete clauses must comply with certain requirements established by the Puerto Rico Supreme Court, to wit: the clause must protect an employer’s legitimate interest, the scope of the restriction must correlate to the employer’s legitimate interest, the restriction cannot exceed 12 months after termination of the employment relationship, the clause must identify its geographical confinements or the clients that will be affected by the restrictive covenant, the employer must offer adequate consideration in exchange for the non-compete clause, and the agreement must also be in writing.

The proposed rule would be added to subchapter J-Rules Concerning Unfair Methods of Competition, part 910-Non-Compete Clauses, of chapter I of title 16 of the Code of Federal Regulations. As proposed, the rule would prevent employers from entering into non-compete clauses with workers and/or require employers to rescind existing non-compete clauses. The term “worker” would include any natural person who works, whether paid or unpaid, for an employer, including employees, individuals classified as independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The only exception recognized by the proposed rule is limited to non-compete clauses between the seller and buyer of a business and would apply only if the restricted party is an owner, member or partner holding at least 25% ownership in a business entity. Non-compete clauses covered by this exception would remain subject to federal antitrust and other applicable laws.

If approved, the proposed rule would supersede any State statute, regulation, order, or interpretation to the extent in which it is inconsistent therewith. Employers would be required to comply with the proposed rule 180 days after publication of the Final Rule. You can read the FTC’s proposed new rule here. If interested, employers may submit comments to the proposed rule on or before March 6, 2023.

B. Recently enacted legislation provides protections for interns

On December 27th, 2022, Act No. 114 of 2022, known as the “Puerto Rico Fair Internship Act”, (Act. 114-2022) was signed into law. Essentially, Act 114-2022 serves the purpose of ensuring that university students and recent graduates receive a fair compensation for their work as a part of an internship program.

Article 4 of the Act defines “internship” as any public or private program that offers a learning and work experience to high school or college students or graduates within one year after graduation. For an internship to be subject to the provisions of the Act, it must meet the following criteria:

1. it must require ten or more hours per week,
2. the duration of the program must be defined before it begins,
3. the participants must have a direct supervisor,
4. supervisors must provide midterm and final evaluations to the participants and discuss the results with them to offer assistance for their development, and
5. the program must include an educational component and mentoring initiatives related to skill development, networking, and professional development.

Pursuant to Act 114-2022, regardless of the terminology used to identify it, if a program meets the above criteria, it will be considered an internship and the organizer must provide compensation to its participants. The minimum compensation required must be based on the federal minimum wage or the state minimum wage, whichever is higher.

However, please note that the following activities are exempted from the provisions of the Act, in which case, compensation would not be required:

1. Programs that are required for graduation or offered in exchange for university credits.
2. Volunteering experiences, defined as the free and voluntary participation of citizens in activities of social or community interest for public or private organizations without compensation of any kind and solely for civic purposes.
3. Shadowing programs where the participant is limited to observing the work of others or where the assigned work does not require any specific skills or knowledge.
4. Internship or volunteering programs offered by federal or state department agencies.
5. Programs offered by non-profit organizations (subject to certain qualifications identified in the Act and the approval of the Puerto Rico Department of Labor and Human Resources).

Article 8 of the Act establishes the rights held by participants in internships, which include, among others, rights to receive monetary compensation, to acquire knowledge and develop skills in a professional and respectful environment, to be informed of the assigned tasks and the evaluation criteria, to be protected against discrimination and hostility, and to work in a safe and healthy environment.

Finally, the Puerto Rico Department of Labor and Human Resources is authorized to issue rules and regulations to assure compliance with the Act.

If you have any questions or comments regarding these recent developments that impact the employment landscape or if you’d like assistance to revise or modify your practices and policies to ensure compliance with local legislation, please contact any of the following attorneys from our Labor & Employment Practice Group at your convenience:

Juan J. Casillas Ayala	787 523-3439	jcasillas@cstlawpr.com
Luis F. Llach-Zúñiga	787 523-3498	lllach@cstlawpr.com
Israel Fernández Rodríguez	787-523-3437	ifernandez@cstlawpr.com
Luis R. Ramos Cartagena	787-523-3483	lramos@cstlawpr.com
Juan C. Nieves González	787-523-3478	jnieves@cstlawpr.com
Natalia E. del Nido Rodríguez	787-523-3481	ndelnido@cstlawpr.com
Natalia M. Palmer Cancel	787-523-6074	npalmer@cstlawpr.com
Cristina B. Fernández Niggemann	787-523-6076	cfernandez@cstlawpr.com