According to the FTC, the proposed rule would invalidate more than 30 million noncompete agreements. If enacted, the rule would require employers with existing noncompete agreements to void them within 180 days after the rule is implemented. Employers would also be required to provide written notice to affected workers that the noncompete provision has been rescinded. You read that right—all prior noncompetes would no longer be valid!

The proposed rule applies to all employers and all workers. Notably, the proposed rule uses the term “workers” instead of “employees,” so the rule would apply to independent contractors, interns and anyone who works for an employer, paid or unpaid.

Under the proposed rule, a “noncompete 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.” In other words, the proposed rule applies to traditional noncompete agreements and other agreements if:

• The agreement is written so broadly it effectively precludes the worker from working in the same field after the conclusion of employment with the employer; or
• The agreement requires the worker to pay for training costs if the worker’s employment terminates within a specified time period, where the payments are not reasonably related to costs the employer incurred for training the worker.

This means that confidentiality, nondisclosure, and nonsolicitation agreements would also be void under the proposed rule if they prevent a worker from continuing to work in the same industry.

The proposed rule comes just one day after the FTC made headlines for taking legal action against three companies— Prudential Security, Inc., O-I Glass Inc., and Ardagh Group SA. The FTC found that they imposed non-competition restrictions on employees, violating the Federal Trade Commission Act, a federal law prohibiting unfair competition and deceptive acts. According to the FTC, each of these companies illegally imposed noncompete restrictions on workers in positions ranging from low-wage security guards and manufacturing workers to engineers that barred them from seeking or accepting work with another employer or operating a competing business after they left the companies. The FTC’s order prohibits the companies and, where applicable, their individual owners, from enforcing, threatening to enforce, or imposing noncompetenoncompetes against any relevant employees. Additionally, the orders:

• Ban the companies from communicating to any relevant employee or other employers that the employee is subject to a noncompete;
• Require them to void and nullify the challenged noncompetes without penalizing the affected employees;
• Require the companies to provide copies of the order to current and past employees who are subject to the challenged noncompetes;
• Require them to provide a copy of the complaint and order to current and future directors, officers, and employees of the companies who are responsible for hiring and recruiting; and
• Require the companies, for the next 10 years, to provide clear and conspicuous notice to any new employees that they may freely seek or accept a job with any company or person, run their own business, or compete with them at any time following their employment.

The FTC’s proposed rule will have sweeping effects on the American workforce and economy. If implemented, a number of businesses and industry groups will mount legal challenges to the rule and the FTC’s constitutional authority. In that regard, when the rule was published, FTC Commissioner Christine S. Wilson published a dissenting statement containing sharp words of criticism, predicting successful legal challenges and calling the proposed rule a “radical departure from hundreds of years of legal precedent….”

Proponents of the rule argue that noncompete agreements depress wages and kill innovation. Some studies have found that noncompete clauses systematically drive down wages, even for workers who are not bound by one. This result, some argue, occurs because if employers know their workers cannot leave for a competitor, employers have less incentive to offer competitive pay and benefits, which in turn depresses everyone’s wages. Furthermore, noncompete clauses may be seen as exploitive and coercive at the time of contracting because of the unequal bargaining power between an employee and employer. Other studies have found that noncompete agreements actually reduce entrepreneurship and start-up formation. Supporters of the rule rely on real-life case studies, like California, a state where noncompetes have been unenforceable as far back as 1913 but still remains the world’s fifth-largest economy.

In contrast, those opposed to the proposed rule cite the freedom to contract and argue that noncompetes are essential to protecting a business’s investments. For example, noncompetes may protect privileged and proprietary information, like trade secrets and intellectual property. They can also prevent an employee from creating close business competition. These protections can enhance a company’s value, protect customer relationships, enhance client confidence, and protect the employer’s investments in employee training.

While there have been recent legislative attempts at the state level to curb noncompete agreements, the FTC’s proposed rule would represent a profound change. That said, the proposed rule is not yet law. At this time, it does not prohibit noncompete agreements or impact their use. Interested parties have until March 10, 2023 to submit comments to the proposed rule. From there, the FTC will review comments, potentially make changes, and publish a final rule. There is a strong likelihood that the FTC will edit the proposed rule to be less restrictive than currently written and may have a more limited reach. For example, a Massachusetts law bans noncompete agreements but limits the ban to certain groups, such as nurses, lawyers, physicians and low-wage employees.

It is important to remember that noncompete agreements are not one-size-fits-all. Employers should generally only use noncompete agreements for employees who could potentially cause harm to a business if they left for a competitor and for employees who may be entrusted with customer relationships, proprietary information, and/or company trade secrets. Employers should review and reevaluate their current noncompete agreements and other restrictive covenants to see how this proposed rule may impact their workforce.