FTC Issues Notice of Proposed Rulemaking to Ban Employee Non-Compete Agreements

In a move sending shockwaves through the business world, on January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would ban employers from entering into non-compete agreements with their workers and invalidate existing non-compete agreements. The FTC will be accepting comments on the proposed rule for the next 60 days.

The proposed rule seeks to ban “non-compete clauses” in employment, defined 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.” The proposed rule’s ban on non-compete clauses would apply to all types of workers, including employees, executives, independent contractors, volunteers, and interns.

Additionally, the proposed rule bans “de facto” non-compete clauses. The proposed rule defines a “de facto” clause as one having the effect of prohibiting a worker from seeking or accepting employment with another employer. The proposed rule gives non-exclusive examples of such “de facto” non-compete clauses, such as overbroad non-disclosure agreements that effectively preclude a worker from working in the same field and requirements for a worker to repay training costs upon termination of employment that are not reasonably related to training costs actually incurred by the employer.

The proposed rule does not explicitly address other types of restrictive covenants, such as customer non-solicitation agreements, employee non-solicitation agreements, or confidentiality agreements. But this is an area employers should monitor closely as they seek to protect their confidential business information and trade secrets.

In addition, the proposed rule would not only prospectively ban employers from entering into non-compete clauses with their workers, but would also require employers to rescind existing non-compete agreements and to notify current and former workers that their non-compete clause is no longer effective.

Significantly, the proposed rule would not ban non-compete clauses entered into in the context of the sale of a business.

The FTC will accept public comments for the next 60 days, which could get extended. If the proposed rule becomes a final rule, it will not take effect until 180 days after the final rule is published. Legal challenges are also expected, which could further delay or altogether invalidate the rule.

In parallel to the proposed rule, on January 4, 2023, the FTC issued a press release announcing that it has taken legal action against three companies to invalidate non-complete clauses applicable to thousands of employees.

Stites & Harbison attorneys are closely monitoring the status of the FTC’s proposed rule and enforcement actions. Contact a Stites & Harbison attorney for guidance regarding how the FTC’s proposed rule could affect your business and how you can protect your business in the event the rule becomes final.

To review the proposed rule, click here.