Proposed FTC Rule Bans Non-Competes

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule prohibiting employers from entering or enforcing non-compete clauses with their workers.?The proposed rule would supersede any inconsistent state law.?Given a March 2022 US Treasury Department report finding that one in five Americans are subject to a non-compete, this proposed rule – if it becomes final – will have significant impact on the workplace.

The proposed rule prohibits employers from asking workers to enter non-competes and requires them to rescind any existing non-competes within 180 days of the date the final rule is published.?The term “worker” includes not only employees but also any person who works for an employer, whether paid or unpaid, such as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to a client or customer.?Interestingly, the rule also bans contractual terms that essentially function as a non-compete clause, such as an overly broad non-disclosure agreement that effectively precludes the worker from later working in the same field or a requirement that a worker re-pay training costs if the worker’s employment ends within a specified time period (where the required payment is not reasonably related to the employer’s actual cost).??

The proposed rule would not prohibit non-compete clauses entered into in connection with the sale of a business or all of its assets where the person restricted by the non-compete is a substantial owner in the business entity.??

The rule is subject to public comment for the next 60 days, after which time the FTC will publish the final rule.?Not surprisingly, numerous business groups have already threatened legal challenges, arguing that that Congress never delegated the authority to create this sort of rule to the FTC and that the proposed rule is unlawful.?Employers should remain alert for further developments on the proposed rule.

The proposed rule may be found at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking

This article is for informational purposes only and should not be considered legal advice. Please consult with your legal counsel regarding any specific situation, particularly given that this is a rapidly developing area of the law.