FTC Proposes Broad Ban On Non-Compete Clauses

Earlier this month, on January 5, 2023, the Federal Trade Commission (FTC) issued a Proposed Rule that prohibits all employers from entering into non-compete agreements with their workers.

 

In issuing the Proposed Rule, the FTC followed through on a White House executive order issued in July 2021 that encouraged the FTC to exercise its rulemaking authority to curtail the use of non-compete clauses that limit worker mobility.

 

Unlike narrowly tailored rules adopted in some states like Maryland that, for example, prohibit the imposition of non-compete agreements on lower income workers, the Proposed Rule is broad.  Specifically, the Proposed Rule prohibits, across-the-board, all employers from entering into a "non-compete clause" with any worker, which includes not only an employee but also any independent contractor, intern, apprentice, or volunteer.

 

Moreover, the Proposed Rule defines “non-compete clause” to mean any contractual term that prevents a worker from seeking and accepting employment with another person or business after the worker’s employment has concluded and contemplates that the term includes “de facto” non-compete clauses that have the same effect.  Indeed, the Proposed Rule expressly contemplates that the term may cover overly broad non-disclosure agreements that preclude workers from working in the same field, as well as contracts that require employees who leave employment within a specified period to reimburse their employers for training costs where the payment is not reasonably related to costs incurred by the employers.

 

The only exception under the Proposed Rule is for a non-compete clause entered into by a substantial owner, member, or partner upon the sale of a business entity or when any such person otherwise disposes of all ownership interests. This exception, however, requires that the owner, member or partner hold at least 25% ownership interest in the business, although the Proposed Rule does not explain how ownership interest is determined.

 

The Proposed Rule also requires employers that already entered into non-compete clauses with workers prior to the rule’s effective date to rescind the existing non-compete clauses and to notify the workers individually that the non-compete clauses are no longer in effect and cannot be enforced.  Employers are also required to give this notice to former workers, provided that their contact information is readily available.  Although the Proposed Rule seemingly intends to require notice to be given to workers and former workers that entered into non-compete clauses, the actual text of the Proposed Rule appears to require that the notice be provided to all current and former employees, regardless of whether they entered into non-compete agreements with their employers.

 

To call the Proposed Rule far-reaching would be an understatement, particularly given how pervasive non-compete clauses are in executive employment agreements and in agreements with employees that work for companies that develop proprietary technology.  If the Proposed Rule comes into effect, government contractors will need to carefully scrutinize their agreements with employees and independent contractors to determine if they include provisions that might fall within the scope of what the Proposed Rule considers a non-compete clause.

 

Comments on the Proposed Rule may be submitted to the FTC through March 10, 2023.