On January 5, 2023, the Federal Trade Commission (“FTC” or “The Commission”) published a Notice of Proposed Rulemaking (NRPM) that would ban all existing and future non-compete agreements between employers and workers. Non-competes generally bar employees from working for a competing employer or starting a competing business for some period of time and/or within a defined geographic area after their employment ends. According to the FTC, approximately one out of five workers are bound by a non-compete clause that restricts them from pursuing better employment opportunities. The FTC has stated its position that such restrictions are “unfair methods of competition” under Section 5 of the Federal Trade Commission Act, and proposes preventing employers from entering non-compete clauses with workers and requiring employers to rescind existing non-compete clauses.
The proposed rules use the term “workers” rather than “employees,” and would apply to individuals acting as independent contractors as well as employees. An “employer” is likewise defined broadly – if a company engages a sole proprietorship as an independent contractor, that company will be an “employer” of the sole proprietor for purposes of the proposed ban. The NPRM does not propose to bar other restrictive terms affecting workers, such as confidentiality and non-solicitation provisions; however, the FTC has proposed that any clause with the practical effect of precluding a worker from seeking other employment or starting a business would be within the scope of the proposed ban. The broad scope of the FTC’s proposed rules will, if adopted, have a profound impact on how businesses engage with their workforce.
Effect on Employers
The proposed rules would not only prohibit employers from entering into (or “attempting” to enter into) new non-compete agreements, but would also require employers to rescind existing non-compete clauses no later than the rule’s compliance date (proposed to be 180 days after Federal Register publication of the final rules). Employers would also be required to provide notice to each affected worker that the existing non-compete clause is no longer in effect; the FTC has proposed language for use in the notice. The proposed ban would apply to small businesses and large enterprises alike.
The ban on non-competes would reach any contractual provision that has “the effect prohibiting the worker from seeking or accepting employment with a person or operating a business” after his or her employment ends. Such “de facto non-compete clauses” would include non-disclosure agreements written “so broadly” as to “effectively preclude the worker from working in the same field” and provisions that require the worker to reimburse training costs “where the required payment is not reasonably related to the costs the employer incurred for training the worker.” It is unclear what the FTC would consider “reasonably related” costs for worker training. Those are not exhaustive examples, and the NPRM indicates that the FTC could look to any provision of an agreement with a worker to determine whether it operates as a de facto non-compete.
In addition to the proposed FTC action, an increasing number of states have general prohibitions of non-competes and employers must ensure they are compliant within the varied non-compete state laws across the country. Currently, California, North Dakota, and Oklahoma have general prohibitions of non-competes. The proposed FTC rule would preempt “inconsistent” state laws, which the NPRM states are those that are less protective of workers than the FTC’s proposed restrictions. Employers should therefore work with their counsel to ensure that their existing agreements independently offer protection of their trade secrets, intellectual property, and other confidential or proprietary information.
The proposed rules would include a limited exception for non-competes in connection with the sale of a business, as long as the person subject to the non-compete is an owner, member, or partner holding at least a 25% ownership interest in a business entity. The FTC is also considering whether non-competes with senior executives might warrant different treatment than non-competes with other workers. That exemption, and any other exemptions that the FTC might consider or adopt, remain subject to federal antitrust law as well as all other applicable law.
Submit a Comment
The Commission invites the public to submit comments on the proposed rule. Comments can be filed at https://www.regulations.gov/ and will be due 60 days after the Federal Register publishes the proposed rules. As of January 10, 2023, the NPRM has not been published in the Federal Register, but we expect the public comment period will be open soon. Companies that rely on non-compete clauses to protect their investments in their workforce and their proprietary information should consider filing comments on the proposed rules.
The CommLaw Group Can Help!
If your company has questions, concerns or is interested in learning more about the rulemaking and its potential impacts, or you are interested in filing comments, please contact the attorney assigned to your account or reach out to Jonathan Marashlian at firstname.lastname@example.org or 703-714-1313.