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On January 5, 2023, the Federal Trade Commission proposed a new rule that would prohibit employers from imposing non-compete agreements on their workers, with very limited exceptions. The FTC has stated that non-competes are an exploitative practice that suppresses wages, hampers innovation, and impedes entrepreneurship. If non-competes are banned, the FTC estimates wages will increase by nearly $300 billion per year and career opportunities will be expanded for approximately 30 million Americans.
Non-compete agreements generally prohibit employees from performing similar services for companies in the same field as their previous employer for a period of time after concluding employment. Non-compete agreements serve to protect employer trade secrets as well as their investments in their business and workforce training.
The proposed rule categorically deems that “it is an unfair method of competition” for an employer to attempt to, or actually enter into a non-compete agreement with a worker; maintain an existing non-compete agreement; or represent to a worker that they are bound by a non-compete agreement where the employer has no good faith basis to believe so. Accordingly, the rule would require employers to rescind all existing non-compete agreements and provide sufficient notice to current and former workers within 45 days of such rescission.
It should be noted that the proposed rule would apply to all “workers,” so, in addition to employees, it also would apply independent contractors, interns, volunteers, apprentices, and sole proprietors. The lone exception to the rule would be a non-compete agreement executed by a person while selling a business or substantially all of the assets of the business, if the person is a substantial owner of the business.
The FTC’s proposed rule would not apply to non-solicitation agreements, which are less restrictive and serve as a limitation on a former employee’s ability to solicit customers, clients, vendors, and/or employees. However, a restrictive covenant of any kind that is so broad as to effectively act as a non-compete (such as an anti-raiding agreement), could be prohibited by the proposed rule, even if not expressly termed as a non-compete.
The FTC has invited the public to submit comments and potential alternatives to the proposed rule. Any comments must be submitted within 60 days after the proposed rule is published in the Federal Register.
If published, the rule will undoubtedly face legal challenges, including whether the FTC has the authority to regulate non-compete agreements. In the interim, it behooves employers to take inventory of the agreements currently in effect and the interests they protect, and assess whether they may be impacted by the proposed rule.
For further information on the FTC’s proposed rule, how to submit comments or alternatives to the FTC, or an assessment of existing agreements, please feel free to contact Jennifer Markowski, R. Victoria Fuller, Christopher J. Redd, or your local FMG attorney.