FTC Proposed Ban of Non-Competes

On January 5, 2023, the Federal Trade Commission (FTC) unveiled its proposed rule, effectively banning most non-competition agreements and superseding all conflicting state laws.

In the proposed rule, the FTC explains non-competes “prevent workers from leaving jobs and decrease competition for workers” and “lower wages for both workers who are subject to them as well as workers who are not.” Therefore, according to the FTC, non-competes are an unfair method of competition and violate of Section 5 of the Federal Trade Commission Act. By targeting non-competes, the FTC anticipates employee earnings could increase between $250 billion and $296 billion per year.

The proposed rule defines a non-compete as an agreement that has “the effect of prohibiting the workers from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Therefore, the proposed rule applies to both explicit non-competition clauses in employment agreements and non-disclosure or non-solicitation agreements that are so broad they operate as de facto non-compete agreements. It would apply to both prospective and existing non-competes. In addition, it prohibits requiring employees to pay back unreasonable “training costs” if the employment relationship ends within a certain time.

The proposed rule would impact all employers and prevent them from entering into or enforcing non-competes with employees or independent contractors. Employers would need to void any existing non-competes within six months of the proposed rule's effective date. The notable exception from this proposed rule is a restrictive covenant entered into in connection with the sale of a business and applies to individuals who own at least 25% of the ownership interest in the company.

What should employers do now?

First, remember this is only a proposed rule. From the date it was issued, the FTC has a 60-day public comment period where it solicits feedback regarding the proposed rule. After the comment period closes, the FTC has its own deliberation period, which could also take significant time if there are a lot of objections to the proposed rule – which there likely will be. Compliance is required 180 days after the final rule is published.

With that said, employers should use the present time to evaluate their ability to comply if the rule survives legal challenges and goes into effect without significant changes. If the goal of non-competes is to protect a company’s confidential information and trade secrets, other clauses can still be effectively used so long as they do not run afoul of the proposed rule. Carefully tailored confidentiality and non-solicitation clauses are enforceable if they are not overly broad. Compliant restrictive covenants should be given only to the most highly compensated in the company and those who genuinely have access to trade secrets. Remember, the proposed rule is meant to prohibit non-competes that unreasonably target low-wage and unskilled workers. Employers should consult with their legal counsel now to determine the extent of the impact to their business and proactively tailor their restrictive covenants to be compliant in the event the proposed rule goes into effect.

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