Federal Trade Commission Proposes Ending the Non-compete Agreement

On January 5, 2023,[1] the Federal Trade Commission proposed new rules which would impact nearly thirty million workers and their employers by banning non-compete clauses in all labor contracts.[2] Non-compete clauses limit workers from working for competing businesses or starting their own competing business within a certain geographic area or time period. Workers of all levels and industries, including C-Suite executives in the financial industry, electrical engineers in the tech industry, hairstylists, and physicians, are often subjected to non-compete clauses.[3] The FTC alleges that the prevalence of non-competes hampers competition between businesses and subsequently reduces wages for workers across the labor market by preventing workers from obtaining higher-paying jobs in the same industry.[4] Companies view non-competes as necessary to protect their trade secrets and to ensure that the hours spent training a worker are not wasted.

To the FTC, the prevalence of non-competes and their impact constitutes an unfair method of competition, as prohibited by the Federal Trade Commission Act.[5] Accordingly, the FTC has submitted a proposed rule proscribing employers from including non-compete clauses in their labor contracts. The proposed ban is broad both in its definition of non-compete clauses and its effect on past, present, and future non-complete clauses.

The FTC’s proposed definition of a non-compete clause is simple: a contractual term 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.”[6] Specifically, the test used by the FTC would look at the effect of the clauses in a labor contract, rather than the purpose of the clauses. This proposed definition could be read to include clauses in labor contracts which are neither purported nor intended to be non-compete clauses. And, notably, the noncompete does not need to be a separate contract, it can be a part of an employment agreement or other document. For example, a non-disclosure agreement which is so unusually broad as to effectively prevent a worker from working in the same industry would likely be considered a non-compete clause.[7]

Not only would these proposed rules ban future non-compete clauses, but they would also force employers to rescind existing non-compete clauses.[8] This would require employers sending notices to former workers, informing them that they are no longer bound by their current or past non-compete clause.

The only exceptions to these proposed rules are non-compete clauses from substantial owners, members, or partners in a business who sell substantially all of their ownership interest or substantially all of the business’s operating assets.[9]

These proposed rules follow closely after the FTC took legal action against three companies for unfair methods of competition, and demonstrate that the FTC intends to expand what its self-declared “vigorous[] enforce[ment]” of the FTC Act § 5.[10]

The proposed rules would be a drastic shift in employment law. However, it is still, at this point, just a proposal. The Commission is currently seeking comments on alternatives to the proposed rules, such as permitting non-compete agreements among senior executives.[11] The Commission is also still evaluating the proposed rules’ potential impact on small businesses and on the compliance costs associated with the proposed rules’ notice requirement.[12] Comments on the proposed rules are due on Monday, March 20, 2023.[13]

If you are interested in submitting a comment to the Federal Trade Commission or need guidance in navigating the upcoming ban on non-competes, contact the experienced attorneys at Eckland & Blando LLP.