The Federal Trade Commission (FTC) has issued a Notice of Proposed Rulemaking that would ban the use of non-compete agreements in employment, independent contractor, and other relationships.
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. The Proposed Rule would also include contractual terms that operate as de facto non- compete clauses, and provides two non-exclusive examples of such offending provisions:
- A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer; and
- A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
In addition to prohibiting employers from entering into new non-compete clauses, the law would also require employers who have entered into existing non-compete clauses with workers to rescind such clause no later than 180 days following the publication of the Final Rule, and provide written notice to the worker. The Notice of Proposed Rulemaking prescribes a form for this notice.
The Notice of Proposed Rulemaking does include an exception for non-compete agreements associated with certain business transactions – a non-compete clause entered into by a person selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or who is selling all or substantially all of a business entity’s operating assets, will not be unlawful under the Rule when the person restricted by the non-compete clause is a substantial owner of, substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.
The full text of the Notice of Proposed Rulemaking is available on the FTC website.
Employers should note that several states – including California, Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia, Washington and the District of Columbia, have enacted laws either restricting the use of non-competes in employment, or restricting the use of non-competes for non-exempt employees or employees who earn less than a given wage threshold. Given these developments, and President Biden’s July 9, 2021 Executive Order on Promoting Competition in the American Economy (in which he announced his intent to ban or limit non-compete agreements), the Notice of Proposed Rulemaking is not entirely unexpected. If a Final Rule is published, we expect it to face legal challenges in the courts.
If you have any questions about how the FTC Proposed Rule will affect your organization, please call our office. Thank you.
This Client Alert provides a general overview of new legal developments. It is not intended to provide legal advice. If you have questions or would like more information about how these developments may affect your business, please contact us at (570) 341-8800.