January 19, 2023
On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if implemented, would prohibit employers from entering into non-compete agreements with their workers (with limited exceptions). The proposed rule would also require employers to rescind existing non-compete restrictions with current and former workers.
The FTC asserts that “the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.” The FTC further asserts that the rule is “based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.”
The proposed rule has garnered a lot of attention in the business community as many businesses rely on non-compete agreements to protect their confidential information and customer good will. It’s not certain if the proposed rule will be revised or blocked prior to implementation. As many remember, the proposed Overtime Rule that was issued by the Department of Labor in 2016 was blocked by a federal judge and never went into effect. Whether the FTC’s proposed rule suffers the same fate is uncertain. Therefore, employers should have at least a general understanding of the proposed rule given its broad-sweeping nature.
What does the proposed rule provide?
In a nutshell, the proposed rule would make it illegal for an employer to: (1) enter into or attempt to enter into a noncompete with a worker; (2) maintain a noncompete with a worker; or (3) represent to a worker, under certain circumstances, that the worker is subject to a noncompete. Employers would also be required to rescind existing noncompetes and actively inform workers that they are no longer in effect. The FTC has provided a model notice that employers could use to provide such notice.
The proposed rule would apply to independent contractors and anyone else who works for an employer, regardless of whether the worker is paid for their service.
Does the proposed rule prohibit confidentiality and non-solicitation covenants or agreements?
It does not appear so. The proposed rule defines a “non-compete clause” as including any 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. Confidentiality and non-solicitation covenants do not prevent workers from seeking or accepting employment with another employer and, therefore, do not seem to fall within the scope of the proposed rule’s prohibition.
Are there any exceptions to the proposed rule?
The only exception to the proposed rule applies to non-compete agreements that are entered into in connection with the sale of a business, an ownership interest in a business entity, or all of a business entity’s operating assets. The exception would only apply to a “substantial owner, substantial member, or substantial partner” who holds at least 25% ownership interest in the business entity that is being sold.
What is the timeline for when the proposed rule could go into effect?
Stakeholders have 60 days to comment on the proposed rule. The FTC would then review the comments and may revise the proposed rule before it is finalized. Once the proposed rule is final, it would take effect 60 days after it is published in the Federal Register, and employers would then have 180 days after its publication to comply with its requirements. Therefore, the earliest possible date for compliance would be around November 2023.
What should employers be doing?
For now, employers should closely monitor the status of the proposed rule. Employers should also review their existing noncompete agreements to determine if they contain non-solicitation language and “blue pencil” and severability language that should allow the enforceable provisions to remain intact even if certain provisions of the agreement are later determined to be unenforceable.
For more information, please contact:
Contact any member of Carmody’s Labor & Employment team.
This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.