Earlier today, my colleague Sarah Niemiroski and I drafted the following alert which has been cross-posted at our firm’s website.
In a move with profound implications for workplaces, the Federal Trade Commission (“FTC”) on Thursday, January 5, 2023, issued a sweeping proposal that would ban all non-compete agreements between employers and employees. While the timing was a bit of a surprise, the move had been telegraphed since mid-2020 when President Biden issued an executive order requiring the FTC to develop new regulations regarding non-compete clauses.
At that time, it was unclear what these proposed regulations would look like – whether they would apply retroactively, whether they would only apply to low-wage workers, or whether there would be any other restrictive covenants implicated. With the unveiling of the new proposal, we have our answer – at least, until the public comment period closes, the proposed rule comes into effect, and the regulation is inevitably challenged in the courts. In the meantime, employers should be aware of the potential consequences of this proposed rule.
Under the proposed rule, it will be an unfair method of competition for an employer to enter into a non-compete clause with a worker, maintain a non-compete clause, or represent that a worker is subject to a non-compete clause where there is no good faith basis to believe that the non-compete clause is enforceable. But what does that really mean? Who will this proposed rule apply to and what will it ban?
This proposed rule will, by its terms apply to all employers without limitation. “Employer” is defined expansively as any natural person, partnership, association, or other legal entity, including any person acting under color or authority of State law. Further, it will apply to all “workers,” paid or unpaid, with no consideration of the worker’s income level or skill. The term “workers” includes independent contractors, interns, volunteers, and apprentices. Some states, like Maine, Maryland, and Massachusetts, currently limit non-compete agreements for “low wage” workers. This rule will supersede existing state laws, and will apply to all workers regardless of income.
The proposed rule bans any non-compete clause between an employer and a worker. A non-compete clause is any contractual term that will prevent a worker from seeking or accepting employment with another person or operating a business after the worker leaves the employer. This includes de facto non-compete clauses that will have the effect of prohibiting the worker from seeking or accepting employment. These de facto non-compete clauses may be non-disclosure agreements that are written broadly enough to prevent an employee from working in the same field; they may also be contractual terms that require the employee to pay for training costs where the payment is not reasonably related to the costs the employer occurred training the worker. The rule does not seem to cover non-solicitation clauses except those that are written so broadly as to be deemed to be a de facto non-compete clause. The rule also does not cover any non-compete agreements entered into in connection with the sale of a business entity.
If this rule goes into full effect, it will require employers to rescind all existing non-compete provisions with workers and provide notice to the worker that the non-compete provision has been rescinded.
It’s important to note that this is merely a proposed rule at this point. It is unlikely that this rule will go into effect exactly as proposed. And even if it does, like the white-collar overtime rules or the vaccine mandate rules that have been proposed by the executive branch before, it is inevitable that any final rule will inevitably be challenged in the courts. We will be monitoring any potential modifications to the rule and any resulting litigation.