Federal Trade Commission Proposes a Nationwide Ban on Non-Compete Agreements
A huge change could be coming to the enforceability of non-compete agreements—and it might be very bad news for employers who rely on such agreements to protect their businesses. On January 5, 2023, the Federal Trade Commission (“FTC”) released a new proposed rule that—if finalized—would ban a broad variety of non-compete agreements and contract terms between employers and workers. This would represent a significant change in U.S. law governing post-employment restrictive covenants and could severely hamper employer efforts to protect their competitive advantages when key employees depart. Here’s what employers need to know now.
What Would the Rule Do?
The proposed rule applies to “non-compete clauses,” which it broadly defines to include “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 rule also applies to “de facto” non-compete clauses, including non-disclosure agreements written broadly enough to “effectively preclude” the worker from working in the same field after leaving employment, as well as contractual provisions requiring workers to pay training costs upon departure if those payments are not reasonably related to the actual training cost the employer incurred.
The proposed rule not only prohibits entering into new non-compete agreements with workers but also would make it unlawful for an employer to “maintain” non-compete clauses with existing employees.
The proposal states that employers with existing non-compete clauses must rescind those provisions no later than the compliance date of the new rule, with individualized written notice to all impacted employees.
This goes much further than many recent state laws limiting restrictive covenants, which typically ban new non-competes but “grandfather in” existing provisions. The new rule would supersede any state law that is more favorable towards non-compete agreements but would not disturb existing state laws that are more restrictive (such as California).
Does the Rule Apply to My Organization and Workers?
The proposed rule is not limited to employers of a certain size or in certain industries. The proposed rule is not limited to employees, but applies to all “workers,” including interns and independent contractors. Non-compete provisions are allowed when issued as part of the sale of a business—but that exception is narrowly drafted so that it only applies to individuals who owned at least 25% of the business.
What about Customer and Employee Non-Solicitation Provisions?
The FTC’s Notice of Proposed Rulemaking states that non-solicitation agreements, which prohibit employees from reaching out to their former customers or co-workers on behalf of a competitor, will generally not be barred by the new rule. However, the FTC cautioned that these types of agreements could still be restricted if they are “so unusually broad in scope” that they effectively function as non-compete agreements.
The FTC’s release of the proposed rule kicks off a 60-day notice and comment period, during which employers will have an opportunity to consult with their counsel and provide any comments to the FTC about the potential impact of these changes. After that comment period, the FTC may publish a final rule. Employers would be required to comply with the rule within 180 days of publication of the final rule. Between then and now, we anticipate substantial critical comments from the business community as well as potential legal action to block the rule from going into effect. We will continue to update readers on this important topic as it develops.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.