FTC Proposes Ban on Non-Compete Agreements

On January 5th, the Federal Trade Commission issued a notice of proposed rulemaking that seeks to implement a nationwide retroactive ban on non-compete agreements, with limited exceptions. The proposed rule would supersede state laws that are less protective of employees.  If enacted, the rule would amount to a near-total ban on the use of non-compete agreements and leave employers with fewer legal options to protect their proprietary and confidential information.

Who does the proposed FTC rule apply?

If adopted as proposed, the rule would ban employers from entering into, attempting to enter into, or maintaining a non-compete agreement with a worker. A “worker” includes an employee, independent contractor, intern, extern, volunteer, or solo proprietor, whether paid or unpaid. Under the rule, “employer” is broadly defined as “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of state law.”

How does the proposed rule define “non-compete clause”?

Under the rule, a “non-compete clause” is defined 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.”

The FTC advises that even if a non-compete agreement is not in place, agreements such as non-solicitation, non-disclosure, and confidentiality agreements may be held in violation of the rule if they are found to be de facto non-compete clauses under the rule’s “functional test.”

How does the rule impact existing non-compete agreements?

The proposed rule requires employers to rescind existing non-compete clauses no later than the rule’s compliance deadline of 180 days after the final rule is published.  Employers must provide formal written notice of the rescission to both current and former employees (unless the employee’s contact information is not readily available) that are bound by non-compete clauses. The rescission notice must be provided within 45 days of rescinding the non-compete clause.

When does the rule take effect?

The public is invited to comment on the rule proposal until the comment period ends on March 10, 2023.  At that time, the FTC may make changes before releasing a final rule. Once the final rule is published in the Federal Register, employers will have a 180-day grace period to become complaint with the final rule’s requirements.

The FTC is specifically seeking comments from the public as to whether senior executives should be exempt or subjected to a rebuttable presumption; whether low and high wage earners should be treated differently; and whether franchisees should be covered by the rule.

Exceptions to the rule?

The rule would not apply to a non-compete agreement between a seller and the buyer of a business, where the affected party restricted is an owner, member or partner holding at least 25% ownership interest in the business.  Similarly, agreements between franchisors and franchisees are exempt from the non-compete prohibition but would apply to their workers.  The proposed rule, if enacted, would supersede all state laws that are not consistent with the rule’s requirements. State laws, however, may provide greater protections for employees against non-competes.

Next Steps

Businesses should consider reviewing existing and proposed non-compete agreements. Businesses should also review non-disclosure, non-solicitation, and other policies requiring employees to reimburse employers for training expenses to evaluate whether these policies might be construed as de facto non-compete clauses if ultimately challenged. Otherwise, companies should continue to monitor the potential implementation of the FTC’s proposed rule, consider submitting a public comment, and be on the lookout for any changes made by the FTC should a final rule be published, which will then trigger the 180-day compliance deadline.

If you have questions about how a non-compete ban may impact your business, contact Commonwealth Counsel Group today.