On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule to ban non-compete clauses. Under the proposed rule, it is an unfair method of competition for an employer to enter into a non-compete agreement with a worker, pursuant to Section 5 of the Federal Trade Commission Act (“FTC Act”).
A non-compete clause is “a contractual term between an employer and worker that prevents the worker from seeking or accepting employment with a person or operating business after the conclusion of the worker’s employment with the employer.”
According to the FTC, approximately 30 million Americans are bound by non-compete clauses. Non-competes not only affect high-earning workers, but they also have a tremendous impact on lower-paid workers. Chairwoman Linda Khan said in a recent press conference: “Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not.” Chair Khan further states that “non-compete clauses also prevent new business from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas,” all of which harm consumers. If adopted, the FTC estimates that the proposed rule could increase American workers’ earnings by nearly $300 billion per year as well as increase competition.
The proposed rule would apply to all types of workers, including employees, independent contractors, interns, and volunteers. Most notably, the proposed rule would apply to both existing and former workers bound by non-compete clauses. Under the proposed rule, employers must rescind the current non-compete clause no later than the "compliance date," which the proposed rule sets at 180 days after publication of the final rule. The proposed rule also includes a notification requirement. If the proposed rule becomes final, employers would be required to send a notice of rescission to all workers that are bound by non-compete clauses.
However, the proposed rule would generally not apply to other restrictive employment covenants, such as non-disclosure agreements and customer non-solicitation agreements. Nonetheless, the FTC advises that these employment covenants may fall within the definition of a non-compete clause if “they are so unusually broad in scope that they function as such.” Moreover, the proposed rule does not apply to non-compete clauses between a seller and the buyer of a business so long as the party bound to the agreement is an owner, member, or partner holding at least 25% ownership interest in the business entity.
Conversely, employers may argue that non-compete agreements are necessary to protect confidential information and other valuable investments. According to the FTC, this argument is not sufficient because the lowest-paid workers generally do not have access to such information. In addition, the proposed rule may present an issue as to whether the FTC has exceeded its authority under the Constitution. In that regard, the proposed rule is sure to receive pushback.
The FTC invites the public to submit comments on the proposal. The comment period will last at least 60 days with the possibility of an extension. Our Firm will continue to monitor the proposed rule and provide updates as appropriate.
Our Firm has extensive experience representing both employees and employers with respect to non-compete clauses, contract review, litigation, and other employment matters. If you have any questions related to this Legal Briefing, please contact any member of our Firm at 585-730-4773. Please note that any embedded links may expire in the future.
This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2023 Law Offices of Pullano & Farrow PLLC