On January 5, 2023, the Federal Trade Commission (FTC) published a proposed rule that, if finalized, would ban all employer non-compete agreements. As currently written, the proposed rule finds that it is unfair competition for an employer to:
- Enter into or attempt to enter into a non-compete clause with a worker;
- Maintain a non-compete clause with a worker;
- Represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
Under the proposed rule, a “non-compete 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.” A “worker” includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.
Under the proposed rule, as defined, a “non-compete clause” would not include restraints during employment, nor would it include other types of common contractual restrictions such as non-disclosure or confidentiality agreements, agreements for the repayment of training costs, agreements providing for the forfeiture of deferred compensation or benefits by competing workers, or agreements restricting a worker from soliciting clients, customers, or other workers. However, the proposed rule provides for a “functional test” under which such restrictions are prohibited if they act as de facto non-competes by being so broad as to have the effect of preventing workers from seeking or accepting other employment following separation from their employer. As a result, if the proposed rule goes into effect, employers should consider having their current non-solicitation clauses and confidentiality agreements reviewed to ensure that they are enforceable and cannot be interpreted as a means to prevent unfair competition under the proposed rule.
The proposed rule requires that employers take affirmative action to rescind existing non-compete clauses with workers no later than the compliance date set forth in the proposed rule, which is currently 180 days after the publication of the final rule. The employer must provide individual notice to each currently employed worker, as well as former workers for whom the employer retains contact information, that are subject to a non-compete clause, advising that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. The proposed rule provides suggested language for such notice.
In addition, the proposed rule would supersede any state statute, regulation, order or interpretation that is inconsistent with the rule. Thus, for example, in Illinois, the provisions of the Freedom to Work Act governing non-compete agreements in Illinois would no longer be enforceable.
Not all non-competes are prohibited under the proposed rule. Non-compete clauses that are entered into as part of the sale of a business, sale of all or substantially all of a business entity’s operating assets or as otherwise disposing of all of a person’s ownership interest in a business entity are not affected, provided that the person restricted is a substantial owner, member or partner in the business entity at the time the person enters into the non-compete clause.
Here is a link to the proposed rule: https://www.regulations.gov/document/FTC-2023-0007-0001. Comments are due by March 10, 2023, and may be submitted electronically to Regulations.gov or mailed to Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580.
The FTC’s supplementary information indicates that the regulator expects comment letters to focus on (1) whether the rule should impose a categorical ban on non-compete clauses or a rebuttable presumption of unlawfulness, or (2) whether the rule should apply uniformly to all workers or whether there should be exemptions or different standards for different categories of workers – senior executives vs. hourly employees, for example.
We will keep you apprised of future developments.