Federal Trade Commission Proposes Rule to Ban Non-Compete Clauses
On January 5, 2023, the Federal Trade Commission (“FTC”) issued a notice of proposed rulemaking to ban the use of noncompete clauses with all workers. The proposed rule would set a national standard, representing a major departure from the current regulatory scheme that is largely dictated by state law.
The proposed rule defines non-compete agreements as “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.” Other restrictive covenants, such as non-disclosure agreements and non-solicitation agreements could easily fall within the definition of a non-compete agreement under the proposed rule. For instance, the rule identifies a non-disclosure agreement written so broadly to effectively preclude the worker from working in the same field after the conclusion of the worker’s employment with the employer as a functional non-compete that would violate the proposed rule.
Another major change is that the ban would apply to all “workers,” broadly defined as any “natural person who works, whether paid or unpaid, for an employer” and expressly includes, without limitation, “an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
There are two exceptions to the rule. First, a non-compete clause may still be used to prevent a person from selling a business from competing with the purchasers of the business. For this exception to apply, the restricted party must be an owner, member, or partner holding at least 25% ownership interest in the business entity. Second, the term “worker” does not include a franchisee in a franchisor-franchisee relationship.
The proposed rule would require employers that have previously entered into a non-compete clause to rescind those non-compete clauses and provide written notice to its workers that the rescinded non-compete clauses are no longer in effect.
The FTC will soon publish the proposed rule in the Federal Register, which will trigger a 60-day public comment period after which the FTC will publish a final rule. The final rule could differ from the proposed rule based on the received comments. After the final rule’s publication, employers will have 180 days to rescind current noncompete clauses and provide the required notice to workers. However, the proposed rule is expected to face intensive legal challenges.
Although the proposed rule is not yet finalized or enforceable, employers can review their existing agreements with workers to assess changes that may be required based on the proposed rule. That review should account for all restrictive covenants, including non-disclosure agreements and nonsolicit agreements. We will closely monitor the FTC’s actions and keep you apprised.