Key Takeaways:
- The proposed rule bans non-compete agreements nationwide for virtually all workers.
- Employers would be required to rescind all current non-compete agreements they have with workers.
On January 5, 2023, the Federal Trade Commission
("FTC") proposed a new rule banning non-compete
agreements. The 218-page notice of proposed rulemaking details
the FTC's position on the value (or lack thereof) of
non-competes, before culminating in a proposed new five-part
regulation, eliminating the use of non-competes nationwide for
nearly all workers. This proposed rule follows the Biden
administration's July 9, 2021 Executive Order, which directed
the FTC to issue a rule limiting the enforceability of non-compete
agreements. Our alert on this Order can be found here.
Specifically, the proposed FTC rule defines the use of non-compete
clauses after the "Compliance Date" (180 days after the
regulation is finalized) as an unfair method of competition. As a
result, employers would be prohibited from entering non-compete
clauses with their workers, including independent contractors. The
definition of non-compete clause is also broad. It includes not
only the traditional notion of a non-compete, but also any
contractual term that operates as a de facto non-compete
– such as broadly written non-disclosure agreements, or
contractual terms that require the worker to pay training costs for
their replacement without tying that number to the actual costs
incurred by the employer.
Additionally, the proposed rule creates two requirements for
employers regarding existing non-competes with workers.
First, employers must rescind all non-compete restrictions before
the Compliance Date. Second, employers are required to provide
individualized notice to all workers whose non-compete was
rescinded that the agreement is no longer in effect within 45 days.
This notice includes current workers, and former workers,
if their contact information is readily available.
Finally, this proposed rule is intended to supersede any state laws
or guidance that is inconsistent with its terms. This effectively
means that non-competes will be banned nationwide, as any state law
allowing their use will be preempted. Despite the large breadth of
the proposed FTC rule, there is one limited exception ? where a
person who is selling a business is a substantial member of that
business at the time they entered into a non-compete
arrangement.
Perhaps in recognition of the need for further limits on the
proposed rule, the FTC has asked for public comment on a number of
topics. Specifically:
- Whether franchisees should be covered by the rule;
- Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and
- Whether low- and high-wage workers should be treated differently under the rule.
At this stage, businesses may submit comments to the FTC articulating their position on the proposed rule. The comment period extends for 60 days after the Federal Register publishes the proposed rule. Now is also a good time for employers to evaluate whether to update their NDAs to include enhanced confidentiality protections, given that such provisions may be the principal way going forward to protect company information and goodwill. We will continue to provide updates on this potentially massive sea change in the law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.