Proposed New Rules Would Upend Employee Non-compete Clauses
On January 5, 2023, the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (NPRM) to prohibit employers from utilizing non-compete clauses with workers at any level within an organization. The issuance of this NPRM commences the 60-day period for which any individual or entity may submit comments to the FTC about the proposed rules.
The proposed rule would define the term “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. The proposed rule would, among other provisions, provide that an unfair method of competition includes for an employer to:
- Enter into or attempt to enter into a non-compete clause with a worker.
- Maintain with a worker a non-compete clause.
- Under certain circumstances, even represent to a worker that the worker is subject to a non-compete clause.
In addition to prohibiting employers from attempting to impose non-compete restrictions on workers going forward, the proposed rule would also require employers to rescind existing non-compete clauses with workers and actively and individually inform them that the clauses are no longer in effect. Under the proposed rule, employers also would be barred from entering into non-compete clauses with independent contractors.
The FTC is specifically seeking public comment on these topics:
- Whether franchisees should be covered by the rule.
- Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban.
- Whether low- and high-wage workers should be treated differently under the rule.
- Whether “no-poach” agreements, in which employers agree not to solicit or hire one another’s workers, and wage-fixing agreements, in which employers agree to limit wages or salaries (or other terms of compensation) should be barred.
Once a rule is finalized, multiple challenges to the FTC’s authority to promulgate this ban on non-compete agreements could be expected, which may lead to the ban’s being enjoined for a period. Ultimately, the issue may go to the U.S. Supreme Court, which in recent years has shown less deference to rules issued by federal agencies that are not clearly supported by express statutory language than the deference the Court previously has shown.
Employers should prepare by analyzing the breadth of their confidentiality clauses and tightening up trade secret protection plans by properly identifying, classifying, and protecting trade secrets with reasonable measures.