On January 5, 2023, the FTC released a Notice of Proposed Rulemaking that would prohibit employers from executing noncompete agreements with paid or unpaid employees, independent contractors, interns, volunteers, and apprentices.
In addition to prohibiting employers from enforcing new noncompete agreements, the proposed rule would also operate retroactively to render existing noncompete clauses unenforceable and require employers to inform employees subject to a noncompete that the noncompete is void within 45 days of the rule’s implementation.
The FTC proposed rule defines noncompete clauses to mean “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 workers’ employment with the employer.”
The FTC proposed rule is drafted broadly and would prohibit not only traditional noncompete clauses, but also agreements that constitute “de facto” noncompete clauses. The “de facto” noncompete clauses that would be swept up in the prohibition include:
- Non-disclosure agreements that are so broad they effectively preclude the worker from working in the same field after the conclusion of the worker’s employment with the employer; and
- A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party 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.
Currently, the proposed rule would not prohibit noncompete clauses between franchisors and franchisees, which remains subject to federal antitrust laws. The proposed rule would also have a limited exception that would apply to noncompete clauses related to the sale of a person’s business.
While employers are concerned the proposed rule would make it harder to retain employees and safeguard intellectual property, the FTC has taken the position that noncompete agreements constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. In support of the proposed rule, the FTC estimates that ending noncompete agreements will increase workers’ earnings by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
As an indication of the impact the proposed rule would have on the workforce and employers if successfully adopted, the FTC estimates that one in five American workers are bound by a non-compete clause.
The FTC invites the public to submit comments on the proposed rule, including topics such as:
- Whether franchisees should be covered by the rule;
- Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and
- Whether low and high wage workers should be treated differently under the rule.
The public and employers can submit comments on the proposal within 60 days after the Federal Register publishes the proposed rule. If adopted, the rule would take effect 180 days after the final version is published.
What about State Laws already prohibiting or restricting the use of noncompete agreements?
Some states have already enacted laws banning or limiting the use of noncompete agreements. California, Colorado, Illinois, Maine, Maryland, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia, and Washington have all prohibited or limited the use of noncompete clauses. However, if adopted, the FTC rule would preempt any inconsistent state laws and enact a nationwide policy banning the use of all non-compete agreements and “de facto” noncompete clauses.
What comes next for employers?
The FTC proposed rule is broad and would potentially invalidate agreements requiring an employee to reimburse an employer for training expenses upon separation of employment, non-disclosure agreements, restrictions applicable to senior executives, tech workers, and other situations where employees receive a tangible benefit for agreeing to the noncompete restriction.
Although the proposed rule would not appear to generally prohibit non-solicitation clauses, the precise reach of the final rule will likely be the subject of widespread litigation and there will likely be other judicial challenges to the rule. If the proposed rule is finalized, it is expected to be met with strong resistance in the courts as overstepping the administration’s rulemaking authority.
Until a final rule is adopted, employers may submit comment on the proposed rule and be mindful of any existing employee agreements that could be subject to the proposed ban.
The Labor and Employment lawyers at Coolidge Wall will continue to monitor for any additional rules and guidance issued by the FTC related to a proposed prohibition on the use of noncompete agreements. Should you have specific questions, please contact us.