On Thursday, January 5, 2023, Federal Trade Commission Chair Lina Khan held a press conference announcing a proposed rule that would ban employers nationwide from both entering into new non-compete agreements with and enforcing existing non-compete agreements against their workers. A copy of the proposed rule is available here. A helpful fact sheet is also available here.
This announcement comes on the heels of President Biden’s July 9, 2021 Executive Order on Promoting Competition in the American Economy. In that Executive Order, President Biden directed the FTC to use its statutory rulemaking authority under the Federal Trade Commission Act “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC estimates that one in five American workers are subject to non-compete agreements and that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year.
The FTC will accept public comment on the proposed rule for 60 days from today’s date and consider these public comments before it issues the final rule. If adopted in its current form, the proposed rule would have the following impact on all employers regardless of size:
- Employers will be barred from entering into new non-compete agreements with “workers,” which the proposed rule defines as “a natural person who works, whether paid or unpaid, for an employer.” Importantly, this definition encompasses not just employees, but also individuals classified as independent contractors.
- Employers will be barred from enforcing existing non-compete agreements with workers.
- Employers will have to rescind all existing non-compete agreements with current and former workers within 180 days of the final rule. Employers will also have to provide individualized written notice to workers that their agreements have been rescinded within 45 days of the rescission.
Importantly, as it is currently written, the proposed rule would apply not only to explicit non-compete agreements, but also to de facto non-compete agreements. De facto non-compete agreements, according to the proposed rule, are agreements that have the effect of prohibiting workers from seeking or accepting new employment.
Examples of de facto non-compete agreements include broadly written non-disclosure agreements between employers and workers that effectively preclude workers from entering the same field. Another example of a de facto non-compete agreement is an agreement requiring workers to repay training costs if the worker terminates their employment within a specific time period and where the repayment is not reasonably related to the costs the employer incurred for actually training the worker.
While the proposed rule itself makes no mention of client non-solicitation agreements, the FTC’s Notice of Proposed Rulemaking notes that “the definition of non-compete clause would generally not include . . . client or customer non-solicitation agreements” because these agreements do not generally prevent workers from competing with their employer altogether. However, the Notice goes onto warn that the examples of de facto non-compete agreements provided in the proposed rule are not exhaustive and that other forms of post-employment restrictive covenants could be considered de facto non-compete agreements depending on the specific facts and how broadly such agreements are written.
Of note, the proposed rule would not apply to non-compete agreements that are entered into by a person who is selling their interest in a business.
The proposed rule would supersede any State statute, regulation, order, or interpretation that is inconsistent with the provisions of the final rule except to the extent that they provide workers with greater protections.
Clark Hill PLC will continue to monitor these developments and provide updates.
