By Mark A. Johnson, Ogletree Deakins
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would prohibit employers from requiring their employees to agree to non-compete agreements.
The FTC proposed new rule is only the first step of the rulemaking process. The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that non-competes are an unfair method of competition. To support its new rule, the FTC argues non-compete agreements suppress wages, reduce innovation, and are the product of unequal bargaining power between employer and employee. The FTC will review comments from the public on the proposed rule; and if it decides to go ahead with the rule, it will publish a final rule. The rule would then become effective 60 days after publication of the final rule.
The FTC estimates that 18 percent of employees in the United States are subject to a non-compete agreement. The proposed rule would make it illegal for an employer to:
- enter into or attempt to enter into a non-compete with an employee;
- maintain a non-compete with an employee; and
- represent to an employee, under certain circumstances, that the employee is subject to a non-compete.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing non-competes and give notice to employees actively inform workers that they are no longer in effect.
The proposed rule would preempt state law. It would not generally apply to other types of employment restrictions, like non-disclosure agreements, or agreements requiring repayment of training costs. However, the rule’s definition of non-compete agreement leaves questions about the types of employment restrictions that it could apply to. Hopefully, the definition will be clarified if the rule progresses. The proposed rule would not apply to non-compete agreements entered into as part of a sale of business.
If the rule progresses, it will face legal challenges on the ground that the FTC does not have authority to issue it. Therefore the future of the rule is uncertain. Employers should monitor its progress and may want to take this opportunity to review the enforceability of any restrictive covenant agreements that are currently using.