As we discussed in an October 2021 article regarding the future of restrictive covenant agreements in the U.S., President Biden in July 2021 directed the U.S. Federal Trade Commission (FTC) to explore potential ways to limit the use of non-compete agreements. On January 5, 2023, the FTC followed through on the President’s directive by proposing a new rule that would effectively ban such agreements.
In short, the FTC’s proposed rule deems it an unfair method of 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; or
- 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.
Notably, the proposed rule takes a broad view as to what constitutes a “non-compete clause.” To start, the FTC defines such a 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.”
The definition does not end there. The proposed rule then goes on to state that the term non-compete clause also “includes a contractual term that is a de facto non-compete clause because it has 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.” The FTC provides the following examples of potentially de facto non-compete clauses:
- 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.
The proposed rule would bar future workplace non-compete clauses with any paid or unpaid workers, including employees, independent contractors and interns. It would also invalidate any preexisting non-compete clauses and would in fact require business to (i) rescind such preexisting clauses and (ii) notify workers of the same in an individualized written communication. The same notification requirements would likewise apply with regard to former workers who remain bound by non-compete clauses, so long as the employer has the worker’s contact information readily available.
The lone exception to the proposed rule is for non-compete clauses that are “entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.”
The proposed rule is far from being final and is merely the first step in the regulatory process. Once the proposed rule is published in the Federal Register, a 60-day public comment period will ensue. That said, employers will want to monitor the progress of the proposed rule over the coming months, as it could present a seismic change to the U.S. business landscape.