The Federal Trade Commission (FTC) has proposed a Non-Compete Clause Rule that would prohibit all employers from entering into non-compete agreements with workers (including independent contractors) on the grounds that such agreements stifle competition, resulting in reduced wages and suppressed labor mobility. Significantly, the proposed rule would require employers to rescind existing non-compete agreements and provide notice to workers that they are no longer in effect.
The proposed rule would define a “non-compete clause” 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” and includes “a contractual term that is a de facto non-compete clause because it has 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 following could be considered de facto non-compete clauses:
- 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.
The proposed rule would ban non-compete clauses categorically. It contains only a limited exception for certain non-compete clauses between the seller and buyer of a business.
Several states already have laws restricting non-compete agreements or are considering legislation to impose such constraints. However, the FTC’s proposed rule is more restrictive than most state non-compete laws. Most states do not currently have a categorical ban on non-competes and they typically differentiate amongst workers (such as by job function, earnings, etc.). The proposed rule would expressly preempt state law that is inconsistent.
The proposed rule discusses alternatives to non-compete clauses that the FTC believes “reasonably accomplish the same purposes as non-compete clauses while burdening competition to a less significant degree,” including trade secret law and non-disclosure/confidentiality agreements, if they are appropriately tailored so they do not function as de facto non-compete clauses.
The rule is open for public comment until March 10, 2023. Commissioner Christine Wilson published a dissenting opinion that provides a roadmap for employers seeking to oppose the proposed rule. Compliance with the proposed rule would be required 180 days after publication of a final rule.
Please let us know if you would like assistance in drafting public comments or have other questions related to the proposed rule.
