06 January 2023

FTC Proposes Ban on Non-Compete Clauses in Employment Agreements

Yesterday, the Federal Trade Commission (FTC) announced a proposed rule to ban non-compete clauses in employment contracts. Non-compete clauses are often important tools for employers in protecting their interests against unfair competition by departing employees for reasonable periods of time within an employer’s competitive markets. The proposed rule would bar employers from entering into or enforcing such clauses with workers.

The proposed rule defines employers broadly to include any person, partnership, corporation, association, or other legal entity that hires or contracts with a worker. The only entities exempted are certain non-profits and state and local governmental entities. Worker is also broadly defined as a person who works, whether paid or unpaid, for an employer. This includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The only worker excluded from the definition is a franchisee in the context of a franchisor-franchisee relationship.

A non-compete clause is defined by the rule as 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 worker’s employment with the employer.  Generally, the rule would not prevent employers from protecting their confidential and proprietary information through other measures that don’t restrict an employee from taking a competing position, such as non-disclosure and non-solicitation agreements.

Highlights of the proposed rule include the following:

  • An employer may not:
  1. Enter into or attempt to enter into a non-compete clause with a worker;
  2. Maintain a non-compete clause with a worker; or
  3. Represent to a worker that he is subject to a non-compete clause without a good faith belief that the worker is subject to an enforceable non-compete.
  • Non-compete clauses existing prior to the ban must be rescinded by the employer within 180 days after the final rule is published.
  • Within 45 days of rescinding the non-compete clause, the employer must provide written notice in an individualized communication to current and former employees informing them that the non-compete clause is no longer in effect.
  • The ban would not apply to non-compete clauses between the seller and buyer of a business if the party restricted by the clause is an owner, member, or partner holding at least a 25% ownership interest in the business entity.

The proposed rule tests the authority of the FTC and will almost certainly spark litigation over whether the Commission has authority to issue the ban.  Comments to the FTC’s proposed rule are due 60 days after it is published in the Federal Register, which we anticipate will occur today. In that case, comments will be due by March 7, 2023.

We will keep you informed of further developments, including with respect to any final rule and legal challenges. If you have any questions, please contact one of the authors or another employment attorney at Miller Johnson.