FTC Proposes Rule to Ban Worker Non-Competes
Practical Law Legal Update w-038-1676 (Approx. 5 pages)
FTC Proposes Rule to Ban Worker Non-Competes
by Practical Law Employee Benefits & Executive Compensation
| Published on 10 Jan 2023 • USA (National/Federal) |
The Federal Trade Commission (FTC) has issued and is seeking public comment on a proposed rule broadly banning employers from imposing non-competes on workers.
On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking to prohibit employers nationwide from entering into non-competes with workers, including independent contractors. The rule would apply both prospectively and retroactively.
Under the proposed rule, employers would be banned from:
- Entering into, or attempting to enter into, a non-compete clause with a worker.
- Maintaining a non-compete clause with a worker (thereby requiring employers to rescind existing non-compete clauses).
- Representing to a worker that the worker is subject to a non-compete clause.
The proposed rule:
- Defines a non-compete clause 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" (16 C.F.R. § 910.1(b)(1) (proposed)).
- Applies a functional test in determining whether a contractual provision is a non-compete clause because it has the de facto effect of prohibiting a worker from seeking or obtaining other employment or operating a business.
- Requires employers to:
- rescind existing non-compete clauses within 180 days of publication of a final rule; and
- provide individualized notice to current and former workers who were previously covered by a non-compete that the non-compete is no longer in effect. (The proposed rule includes model language that would satisfy the notice requirement and also establishes a safe harbor for satisfying the notice requirement.)
- Includes a narrow exception for non-compete clauses between the seller and the buyer of a business, but only where the party subject to the non-compete owns at least 25% of the business.
- Supersedes any state law contrary to the non-compete ban, but not any law providing greater protections for workers.
(16 C.F.R. §§ 910.1 to 910.5 (proposed).)
FTC Rationale for Proposed Rule
Citing research indicating that non-competes hurt workers and harm competition, the FTC estimates that the rule would:
- Increase workers' earnings by nearly $300 billion per year.
- Save consumers up to $148 billion annually on health care costs.
- Double the number of companies founded by a former worker in the same industry.
Request for Public Comment Contemplates Additional Exceptions
The FTC is seeking public comment on several alternatives to the proposed rule, including whether:
- Franchisees should be covered.
- Different standards should apply to senior executives, such as a rebuttable presumption of unlawfulness rather than a ban.
- Low-wage and high-wage workers should be treated differently under the rule.
Although the proposed rule indicates that the comment period will be open for 60 days following publication in the Federal Register, the FTC opened a comment portal on Regulations.gov on January 9, 2023, before publication in the Federal Register (FTC Docket No. FTC-2023-0007-0001). Comments are due by March 10, 2023.
Opposition and Challenges to the FTC Proposed Rule
The proposed rule has already faced considerable opposition. For example:
- With the FTC's announcement, FTC Commissioner Christine Wilson issued a dissenting statement.
- On the day of the announcement, the US Chamber of Commerce declared the proposed rule "blatantly unlawful" (US Chamber of Commerce Press Release, Jan. 5, 2023).
Most commentators predict that any final rule by the FTC will:
- Include significant changes.
- Face numerous legal challenges.
Effective Date
The proposed rule contemplates an effective date of 60 days after publication of a final rule in the Federal Register and a compliance date of 180 days after publication of a final rule in the Federal Register.
Practical Implications
Although the proposed rule does not require any immediate action by employers or change current law, employers should be aware of a continuing legislative trend at the state level restricting non-competes and ensure that their restrictive covenant agreements (and other agreements containing non-competes, such as executive employment agreements) comply with applicable state laws and independently include sufficient protection of their trade secrets and other confidential and proprietary information.
Employers should also stay abreast of developments in this area in anticipation of a potential sea change if the proposed rule becomes final.