What Employers Must Know about the FTC’s Proposed Rule Banning Non-Compete Clauses
Employers should submit public comments on the broad scope and vagueness of the proposed rule as the FTC is accepting comments through March 10, 2023.
Begin to consider eliminating non-compete clauses of low-wage earners to comply with one of the FTC’s top goals.
Employers should consider working with counsel on auditing current non-compete clauses, as well as other restrictive covenants, to ensure they are aware of what type of agreement they now have.
On January 5, 2023, the Federal Trade Commission proposed a new rule with the goal of implementing a nationwide ban on the use of non-compete clauses in employment contracts. The FTC cites significant evidence exists that non-compete clauses prevent workers from pursuing better job opportunities by decreasing competition, reducing wages, and inhibiting entrepreneurship. The rule states that an employer may not: (1) enter into, or attempt to enter into, new non-compete clauses as of the Compliance Date; (2) maintain pre-existing non-compete clauses as of the Compliance Date; and (3) represent to workers, under certain circumstances, that the worker is subject to a non-compete. The FTC believes this will increase employee’s wages by nearly $300 billion per year.
The proposed rule comes as a response to President Biden’s July 9, 2021 Executive Order to promote economic competition and scrutinize anticompetitive practices and policies on competition. The FTC has cited significant evidence that non-compete agreements are unfair methods of limiting competition and suppress worker’s wages and entrepreneurism. With the passing of this rule, employers would once again be on the defensive in trying to protect company proprietary information, trade secrets and business assets and investments from employees trained and given access to this vital information. The proposed rule separates a non-compete clause from other types of common contractual restrictions such as non-disclosure agreements, confidentiality agreements, and agreements restricting employees from soliciting clients and customers.
Here are some of the proposed changes outlined by the FTC proposed rule of which employers should be aware:
- A functional test would be conducted to determine if a contractual term is a non-compete clause.
- A de facto is defined as a restriction so broad that it precludes workers from working in the same field after the conclusion of their employment with the employer.
- Any existing contractual term that includes a de facto non-compete clause is to be rescinded.
- Contractual terms that include unreasonable repayment of training costs upon termination within a given period are considered de facto
- Employers are required to provide notice to current and former employees that their non-compete clauses are no longer in effect within 45 days of rescinding the non-compete clause.
- The only exception in the proposed rule is for non-compete clauses in the sale of a business; and,
- The new rule would preempt and supersede any state statute or regulation.
While the proposed rule would not go into effect immediately, and is likely to face legal pushback, employers would have 240 days (effective 60 days after publishing in the Federal Register; 180 days after going into effect) to become compliant. The FTC has invited the public to submit comments on the proposed rule. The public comments are being accepted through March 10, 2023. The FTC will review said comments and make necessary changes. Employers are encouraged to submit public comments giving the FTC as many viewpoints as possible, questioning the vagueness and overall justification for the broad proposed rule. The rule in its current form is still considerably vague regarding categorical distinctions between employees or exceptions based on earnings or job functions.
Further, employers should consider eliminating non-competes for low-wage earners. While the rule defines a worker as a natural person who works, whether paid or unpaid, for an employer, these lower-wage or unpaid workers are not subject to the same trade secrets and business assets as higher-wage earners. Removing non-compete clauses from their employment contracts would satisfy one of the FTC’s major goals with this proposed rule of not limiting an employee’s opportunity to seek higher paying jobs.
Finally, employers are encouraged to speak with counsel regarding auditing their current non-compete clauses and restrictive covenants in their employment agreements. Employers have alternatives to protecting proprietary information and client relationships through other restrictive agreements such as: non-solicitation agreements, non-disclosure agreements and intellectual property agreements, none of which is affected by the FTC proposed rule. Additionally, while the proposed rule will meet legal backlash before a final rule is published, this will not keep states from enacting their own laws regarding non-compete clauses. Counsel can assist with ensuring that employers non-compete clauses are reasonably tailored and comply with future state and federal regulations.
If you have any questions about these potential changes or how they impact your business, please contact:
- Terrence L. Mitchell
- Caroline J. Berdzik
- Scott R. Green
- Stephen C. Mazzara