FTC to Employers: Say Goodbye to Your Non-Competes
Co-Authored with Christina Bost Seaton
Explosive news issued from the Federal Trade Commission (FTC) when it proposed a rule on January 5, 2023, purporting to ban all non-compete provisions by all employers (regardless of size) as to all workers.
Notice that we wrote “workers,” not employees. That’s right. The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, like an intern or volunteer.
In fact, this is a categorical ban of all non-compete provisions applicable to all workers, not just lower-wage workers like in Virginia, Maryland, D.C., Oregon, Illinois, and in other states.
Of course, we are hosting a free Zoom to discuss the proposed rule on Monday, 1.9.23, at 1 pm ET about the proposed rule. Here is the link to register: https://us02web.zoom.us/meeting/register/tZIkd-mprz0qEtIm-DTX99WbjRzltNA1jIu7.
The FTC Hinted Earlier This Week That A Change Was Coming
The proposed rule follows landmark legal actions announced earlier this week — for the first time ever, the FTC commenced litigation to invalidate non-compete agreements. The FTC announced settlement orders entered into in each case that invalidated existing restrictive covenants and prohibited the companies at issue from entering into new agreements.
While we expected the FTC to issue proposed rules on non-competes after the Executive Order on Promoting Competition in the Economy in July 2021, which called for the FTC to “curtain the unfair use of non-compete clauses…that may unfairly limit worker mobility,” the proposed rule goes beyond limiting “unfair” non-competes, and instead calls for a ban of all non-competes.
What Does The Proposed Rule Prohibit?
The FTC’s proposed rule would generally prohibit an employer from including non-compete clauses in their employment agreements. This includes:
- entering into or trying to enter into a non-compete agreement with a worker;
- maintaining a non-compete with a worker; or
- representing to a worker, under certain circumstances, that the worker is subject to a non-compete provision or agreement.
How Does The Proposed Rule Define A Non-Compete?
This is one of the most interesting aspects. The proposed rule defines “non-compete clause” as a contract 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 worker’s employment with the employer ends.
The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions. There will be no camouflaging a non-compete by calling it a “non-acceptance of employment” or “non-interference” clause — it’s a functional test.
Are There Exclusions To What Constitutes A Non-Compete?
Of course! Thusfar, the FTC overview specifies that the definition of “non-compete” does not include a non-disclosure agreement and client or customer non-solicitation agreement. Generally.
The FTC explains that “these covenants generally do not prevent a worker from seeking or accepting employment…However…such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”
In other words, if a provision prohibits a worker from seeking or accepting employment with a business post-employment, it’s no good. If an employer drafts such a provision too broadly and it could operate as a non-compete, it will likely be deemed unlawful.
The proposed rule includes these examples:
- A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
- A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
What About Non-Competes That Are Part of the Sale of a Business?
The proposed rule specifically does not apply to a non-compete that is entered into ancillary to the sale of a business if the party restricted by the non-compete clause is deemed to be a “substantial owner,” which is someone who is an owner, member, or partner who holds at least a 25% ownership interest in a business entity.
Wait, There’s More.
The proposed rule impacts new non-compete provisions AND existing ones.
Employers will be required to rescind existing non-competes by the compliance date and notify workers that they are no longer in effect. Here is the “model language” to advise workers with non-competes that they are now void.
Do Employers Have No Say? What’s the Timing On All Of This?
Employers may want to comment, and there is a 60-day comment period. The final rule would take effect 180 days after publication of a final rule in the Federal Register.
Are You Going to Do A Webinar About The FTC Proposed Rule?
Employers, please join FisherBroyles partners Eric Meyer, Christina Bost Seaton, and me for a free Zoom on Monday, 1/9/23, at 1 pm ET about the proposed rule. Here is the link to register: https://us02web.zoom.us/meeting/register/tZIkd-mprz0qEtIm-DTX99WbjRzltNA1jIu7. Space is limited to 1,000. There is much to discuss, and we look forward to noodling on this proposed rule with you.
What If I Want To Read The Proposed Rule Myself?
More power to you! Here is the Rule and some additional resources:
- 16 CFR Part 910: Non-Compete Clause Rule Notice of Proposed Rulemaking
- Fact Sheet: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition
- Statement of Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya Concerning the Notice of Proposed Rulemaking for the Non-Compete Clause Rule
- Non-Compete Clause Rulemaking