On January 5, 2023, the Federal Trade Commission (FTC) released a proposed rule aimed at prohibiting employers from utilizing non-compete clauses in employment agreements. Importantly, the proposed rule seeks to supersede all existing and contrary state laws that otherwise allow non-compete clauses. The details of the rule are contained in the FTC's Notice of Proposed Rulemaking.
The proposed rule would "provide that it is an unfair method of competition for an employer to enter into, or attempt to enter into, a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause." Both independent contractors and employees are covered under the coined term "worker" for the purposes of the proposed rule.
In addition, the proposed rule would retroactively apply such that employers would be required to rescind existing non-compete clauses, and actively inform current and former workers that their existing non-compete agreements are no longer effective.
Perhaps most notable is the proposed rule's broad spanning definition of "non-compete clause." The proposed rule defines a "non-compete clause" as any "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 also clarified whether a contractual provision should be regarded as a non-compete clause would depend, not on the name of the provision, but how the provision functions. In other words, any agreement or contractual clause which has the effect of a non-compete clause would be subject to the ban.
Despite the limitation on non-compete clauses, the FTC clarified the proposed ban would generally not include other types of restrictive employment covenants, such as non-disclosure agreements ("NDAs") and client or customer non-solicitation agreements. The FTC reasoned these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer. However, and, as discussed above, if these agreements essentially acted as a limit on the worker's ability to perform work for another entity, they may still remain subject to the proposed rule's ban on non-compete clauses.
The FTC's proposed rule has been anticipated for at least a year, when President Biden tasked the FTC to initiate rulemaking on non-compete clauses in an Executive Order on July 9, 2021.
While the proposed rule is sure to generate significant discussion, it is important to remember that the rule is not yet finalized and not in effect. Employers throughout various industries will undoubtedly have ranging opinions on the imposition, fairness and effectiveness of non-compete clauses. The FTC's proposed rule is currently subject to public comment, which are presently due March 6, 2023. Direct legal challenges to the rule, and the FTC's authority to implement it, are probable as well. Employers with questions as to the proposed rule's impact on their operations-and whether to submit formal comments to the FTC - should review the proposed rule's impact and consult with their employment counsel.
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