President Biden and the FTC Seek to Put the Final Nail in the Coffin for Non-Compete Agreements
On January 5, 2023, the Federal Trade Commission (“FTC”) published a notice of a proposed rulemaking that would prohibit employers from enforcing non-compete agreements against all employees and would preempt state laws that otherwise allow these agreements.
The proposed rule would prohibit any contractual term that functions to prevent a worker from seeking or accepting employment or operating a business, after leaving the employer. The prohibition would apply broadly to all “workers,” including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The rule would not “grandfather” in existing non-compete agreements. Instead, employers would have to rescind all non-compete provisions and inform workers in writing via letter, email, or text message that the agreement is no longer in effect and will not be enforced. However, the rule would not ban non-disclosure or customer non-solicitation agreements unless those provisions were broad enough to operate as a non-compete agreement.
At this stage, the FTC proposed rule is not law. Interested parties have 60 days to provide comments on the proposed rule, and the rule (whether in its current form or as revised based on comments received) will not go into effect until 180 days after a final rule is published.
The FTC’s proposed rule is the latest effort at the federal and state level to ban or restrict non-compete agreements. For example, in 2020 the Commonwealth of Virginia passed a law that banned non-compete agreements for low wage workers, which is defined as workers making less than the annual average weekly wage ($67,080 in 2022). Even if the FTC’s proposed rule that seeks to put the final nail in the coffin for non-compete agreements does not become effective, these agreements will continue to face increasing scrutiny from legislatures, regulatory agencies, and the courts. Employers who rely on non-compete agreements to protect against unfair competition should consult legal counsel to evaluate whether narrower non-disclosure or non-solicitation of customers agreements may better protect their interests.
If you have any questions, please contact our Labor & Employment Practice Group