FTC Proposed Rule Would Eliminate Employment-Related Non-Competes
On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule that would effectively ban non-compete agreements for all workers, with one narrow exception.
The FTC’s proposed rule comes at the directive of President Biden’s July 9, 2021, Executive Order on Promoting Competition on the American Economy, which encouraged the agency to limit or ban non-competes. Citing a “preliminary finding that that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act,” the FTC estimates that the proposed rule “could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
If the proposed rule is enacted as its currently drafted, employers are likely to find their current non-competes are not compliant. They will also be limited in how they can use non-compete agreements to protect their business interests, and, conversely, have decreased control over employees leaving for jobs with competing businesses and peer companies.
Impact of the Proposed Rule
Traditionally, courts enforce non-competes that are:
- Reasonable in geographic scope and duration;
- Protected a legitimate business interest; and
- Not contrary to public policy.
The FTC’s proposed rule would effectively eliminate this standard.
The proposed rule defines a prohibited non-compete 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.” “Worker” is broadly defined to include employees, independent contractors, interns, volunteers, apprentices, whether paid or unpaid.
As currently drafted, the proposed rule would make it illegal for an employer to:
- Enter into or attempt to enter into a non-compete with a worker;
- Maintain a non-compete with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
Significantly, the second prohibition means that employers will be required to rescind any existing non-competes and actively inform current and former workers that they are no longer in effect. The proposed rule contains model language that employers should use to provide such notice.
The prohibition extends to any restrictive covenant that is written so broadly that it operates as a de facto non-compete. So, while non-solicitation agreements and non-disclosure agreements are seemingly excluded from the proposed rule’s definition, if language resembles a non-compete, they will run afoul of Section 5. The FTC proposes a “functional test” be applied to determine whether a contractual term is a de facto non-compete, but the parameters of this test are not clearly defined by the proposed rule.
The proposed rule contains one narrow exception for a non-compete entered into by a substantial business owner or partner (defined as holding at least 25% ownership interest) who is selling a business entity or otherwise disposing of all ownership interest. In those limited scenarios, non-competes would remain subject to Federal antitrust laws as well as all other applicable state common law principles.
The proposed rule applies retroactively and preempts state law. Many states already have laws curtailing or even banning non-competes, in which case any greater protections provided by said laws will remain in effect.
Next Steps in FTC’s Rulemaking Process
Unsurprisingly, the FTC is facing backlash from the business community over its sweeping proposal. The U.S. Chamber of Commerce promises legal challenge to the proposed rule if passed in its current form. There also is a threshold question of whether the FTC fundamentally lacks the authority to engage in this type of rulemaking.
Considering these valid concerns, the FTC has included potential alternatives to a categorical ban, including a rebuttable presumption of unlawfulness or different standards for different categories of workers like executives. The FTC also may consider salary thresholds, similar to those states that ban non-competes for low-wage workers like Colorado, Illinois, Maine, Maryland, New Hampshire, Rhode Island, and Washington.
With the original public comment period lapsing on March 20, 2023, the FTC extended the public comment period until April 19, 2023. Employers may want to consider submitting a comment by filling out the FTC’s online submission form. All comments are available for public viewing and therefore should not include any sensitive or confidential information.
Post & Schell’s Employment and Labor Practice Group is closely monitoring these developments. Please feel free to contact our team with any questions.
Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.
