On January 25, 2023, the Federal Trade Commission (“FTC”) announced that it is proposing new regulations that would bar employers from entering into or enforcing non-compete agreements with employees.
Under current law, agreements containing non-compete clauses are governed by state-restrictive covenant statutes or common law.
According to the FTC, the proposed rule is needed to combat allegedly unfair methods of competition that violate the Federal Trade Commission Act. The proposed regulations would bar non-compete agreements, defined by the FTC 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.
The proposed rule does not generally apply to non-solicitation provisions (soliciting company clients or employees), unless those provisions are so broad in scope that they function as a non-competition agreement. The FTC includes the following as examples of prohibited non-compete agreements:
• A non-disclosure agreement 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;
• A contractual term in an employment agreement that requires the worker to pay the employer or third-party entity for training costs if the worker’s employment terminated within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
The proposed regulation would apply to all employers in the United States, regardless of size or number of employees. It would also cover all employees, paid or not, and independent contractors.
In addition to barring employers from entering into non-compete agreements, the proposed regulation would require employers to rescind existing non-compete agreements and provide notice to existing employees that their non-compete agreement has been rescinded.
The bar on non-compete agreements would not apply to non-compete agreements entered into with individuals who are selling substantially all of their ownership interests in a business (or substantially all of the assets of a business), provided that the person subject to the non-compete owned at least 25% of the business being sold.
The proposed regulation would supersede any state or local rule that is inconsistent with the FTC’s rule and employers would have to come into compliance with the regulations 180 days after publication of the final regulations.
At this point, the FTC has only filed a Notice of Proposed Rulemaking and opened the comment period on the proposed rule.
The comment period remains open until April 19, 2023.
Once the comment period closes, the FTC will review the comments and may make changes to the proposed rule prior to publishing the final rule. The proposed rule will become law 180 days after the publication of the final rule. In light of the proposed rule, employers should examine their current use of non-compete agreements and consider potential alternatives
to safeguarding their confidential information and customer goodwill.
For example, an employer may want to consider whether non-solicitation and non-disclosure agreements can protect against unfair competition and legally prohibit former employees from misappropriating confidential information in order to solicit clients or staff.
Carefully drafted agreements that take into account the proposed rule may save employers headaches down the road.
If you have any questions about the FTC’s proposed rule and how it could impact your business, please contact AKC employment law attorney Julie Ryan at [email protected].