On January 5, 2023, the Federal Trade Commission (FTC) issued a notice of proposed rulemaking that would make non-compete agreements between an employer and worker (paid or unpaid) an unfair trade practice in most circumstances. The FTC cites Section 5 of the Federal Trade Commission Act as the source of authority for the proposed rule; this section generally prohibits “unfair methods of competition.”
The proposed rule targets non-competes that go into effect after separation, where specific clauses limit the worker’s ability to continue to work in the same business or with a competitor of the original employer. Under the proposed rule, employers would be required to rescind existing non-compete agreements, including with former and current workers, effective as of the proposed “compliance date” – 180 days from publication of the FTC’s final rule. Employers would be required to issue individual notice to workers that their non-compete agreements are rescinded. The proposed rule allows proper notice to be deemed a rescission of the worker’s noncompete.
The proposed rule interprets non-compete agreements broadly, to avoid circumvention. For example, an overreaching non-disclosure agreement or claw-back of training expenses could fall within the rule’s scope.
The proposed rule contains an ownership exception for persons selling an entire business or their interest in the business if the owner/seller owns 25 percent or more of the business. These owners can be subject to a non-compete agreement.
The FTC reports that non-compete agreements are harming the nation’s workforce and suppressing wages by limiting competition. The rule responds to abusive practices where non-competes are imposed on low-level workers who have little ability to bargain. The rule-making is comprehensive, and would preempt the patchwork efforts of nearly half the states in limiting non-compete provisions through legislation, regulations, or common law.
The FTC is accepting comments to the proposed rule until March 20, 2023. As of February 14, 2023, the FTC had received over 11,000 comments. The FTC anticipates that the final rule may be significantly different from the proposed version. Whatever form the final rule takes, it is likely to have significant impacts for LBB’s individual and organizational clients. LBB continues to monitor the rulemaking and related developments and is available to discuss these potential impacts and assist in submitting comments to the proposed rule.
The following is a link to the FTC’s proposed rule and portal for submitting comments: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.