The Federal Trade Commission (FTC) proposed a rule last week that would ban employers from requiring workers to sign non-compete provisions in employment contracts. The rule also would prevent employers from entering into new non-compete agreements with workers and require employers to rescind existing non-compete agreements.
Non-compete provisions limit workers from leaving an employer to work for a competitor or starting a competing business after their employment ends. Most states have statutes that restrict or prohibit non-compete provisions. Except in states that ban non-competes outright, these agreements typically will be enforceable if they are reasonable in scope and protect an employer’s legitimate business interests.
Under the proposed rule, non-compete clauses would be deemed “an unfair method of competition and therefore a violation of Section 5” of the Federal Trade Commission Act. The rule would make it illegal for an employer to enter into a non-compete with a worker, attempt to do so or suggest that a worker is bound by a non-compete agreement when they are not. Employers would also be required to rescind existing non-compete agreements and provide notices to the workers who are parties to such agreements that their covenant not to compete is no longer in effect. The proposed rule defines “workers” broadly to include not only employees but also independent contractors, externs, interns, volunteers, apprentices and sole proprietors.
Despite its broad scope, some notable limits, exceptions and alternative considerations are outlined in the proposed rule. One is that the definition of a non-compete clause would generally not include non-disclosure agreements or customer non-solicitation agreements. Another proposed exception would permit non-competes in the context of a business sale where the restricted party is an owner, member or partner with at least a 25% ownership interest in a business entity.
The notice also considers whether different restrictions could apply to different categories of workers based on job function, occupation and earnings. For example, it considers as an alternative banning non-compete clauses except for senior executives, employees earning more than $100,000 annually (or independent contractors earning more than $250,000 annually) or workers classified as exempt under the FLSA.
The FTC’s proposal had been anticipated since President Joe Biden issued an executive order in 2021 discussing the injurious effects of post-employment restrictions on the broader economy. In his order, Biden urged the FTC to “consider” making a rule to “curtail the unfair use of non-compete clauses and other clauses in agreements that may unfairly limit worker mobility.” (Click here to read a prior blog post by Merrell Renaud with more information about the executive order.)
Some business advocates believe the FTC’s rule is unlawful, arguing that the FTC has no legal authority to enact it. FTC Chair Lina Khan, however, believes the agency has clear authority to issue the rule, as federal law empowers the agency to prohibit unfair methods of competition. Public comments on the proposed rule are due 60 days after the FTC publishes the proposed rule in the Federal Register. If the rule is finalized, the compliance date will be 180 days after it is published in the Federal Register.
Whether and in what form this rule will become final remains to be seen. In the meantime, employers may submit comments on the proposed rule or the alternative considerations outlined in the notice. Employers should also consider assessing their current use and enforcement of non-compete agreements in light of the proposed rule should it, or a variation of the rule, become final. Employers should contact counsel to discuss the possible application of this rule to their business.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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