On January 5, 2023, the Federal Trade Commission (“FTC”) published a proposed rule that would ban employers from imposing non-compete clauses with employees (“Proposed Rule”). If adopted, it will make it easier for employees to switch jobs, and will impact employee compensation structure and the protection of confidential information.
What is a Non-Compete Clause?
The Proposed Rule defines a “non-compete clause” 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.” Traditionally, the purpose of such a clause is to prevent workers from working for competitors after their employment. Non-compete clauses are used for a variety of reasons: they can reduce labor turnover, improve employer leverage in future negotiations, and protect trade secrets.
Why Does the FTC Want to Ban Non-Compete Clauses?
In some states, non-compete clauses are not allowed in employment agreements. For example, non-compete agreements are prohibited, and therefore unenforceable, in California (with a few limited exceptions). Employers, including those who operate out of the state but employ California residents, are prohibited from enforcing non-compete agreements. If the Proposed Rule is adopted, it will supersede all state laws, regulations, orders, and inconsistent interpretations of the Proposed Rule. However, states can still impose their own requirements and restrictions if they afford greater “protections” than those provided by the Proposed Rule.
On the federal level, the Biden administration has continually supported limiting the use of restrictive covenant agreements. On July 9, 2021, in his Executive Order on Promoting Competition in the American Economy, President Biden expressed for “a whole-of-government approach … to address overconcentration, monopolization, and unfair competition in the American economy.” The Order specifically called on the FTC to consider exercising its “rulemaking authority … to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
What Would the Proposed Rule Specifically Do?
In short, the Proposed Rule would eliminate nearly all post-employment non-compete restrictions. It would cover agreements with any worker, including employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer. Furthermore, the Proposed Rule would equally apply to all workers, regardless of compensation status.
The FTC notes that while agreements such as customer non-solicitation agreements, confidentiality agreements, and liquidated damages agreements are not expressly prohibited, such agreements may be considered to consist of “de facto non-compete clauses” if they have “the effect of prohibiting 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.”
Exceptions to the Proposed Rule are non-compete clauses between a seller and buyer of a business where the party is restricted as an owner, member, or partner holding at least 25% ownership interest in the business.
Would Existing Non-Compete Agreements Be Banned?
If the Proposed Rule is adopted, agreements with non-compete clauses that were entered into before the compliance date will need to be rescinded 180 days after the publication of the final rule. To do this, employers will need to provide a formal written notice of rescission to existing employees bound by a non-compete clause and former employees bound by non-compete clauses. Section 910.2(b)(2)(C) provides a template notice of rescission language that can be used to comply with this requirement.
The FTC has invited the public to comment on the Proposed Rule. The comment period will close on March 10, 2023. MNK Law will continue to monitor developments by the FTC with respect to the Proposed Rule. For more information on the Proposed Rule, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
