Federal Trade Commission Proposes New Rule Which Would Virtually Eliminate Almost All Non-Compete Agreements
On Jan. 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if enacted, would prohibit an employer’s use of non-compete agreements and which would preempt all inconsistent laws or regulations, with limited and narrow exceptions.
The proposed rule provides that an employer:
- cannot enter into a non-compete agreement with a worker;
- cannot represent to a worker that the worker is subject to a non-compete clause when the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause;
- must rescind existing non-compete agreements; and
- provide workers (both current and former) with existing non-compete provisions with a notice that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker.
A non-compete agreement is defined broadly by the rule: “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.” Additionally, the proposed rule sets forth a functional test to determine whether a “de facto” non-compete agreement exists: whether the provision would have “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 proposed rule provides two examples of a “de facto” non-compete clause:
- 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.
If enacted, the proposed rule will reach and apply to almost all workers, including an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer. However, the rule provides a narrow exception for non-competes entered into in connection with the sale of a business. Specifically, it will not apply to:
- A non-compete clause that is 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
- To a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by a non-compete clause is a substantial owner of, or a substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.
Employers should continue to monitor the proposed rule and proactively review their current use of non-compete agreements so that they are prepared to comply if and when the rule is enacted.
Phillips Murrah’s labor and employment attorneys continue to monitor developments to provide up-to-date advice to our clients regarding new rules that affect employers.
Laurel L. Baker is a litigation attorney whose primary focus is on commercial and business litigation matters representing both plaintiffs and defendants in disputes involving banking, corporate governance, contracts, mergers and acquisitions, employment, and other business issues.