On Jan. 5, 2023, the Federal Trade Commission (FTC) announced a slate of proposed rulemaking. Of interest to employers in particular is a proposed rule that would completely ban the use of non-competition or non-compete agreements, which prevent employees from working for a competitor or starting a competing business. Typically, these agreements often last months or years and are limited to a certain geographic scope. The FTC noted that it believes non-compete agreements often have the effect of lowering workers’ wages.
What does the proposed rule to ban non-compete agreements entail?
The rule would be a complete bar to all non-compete agreements going forward. Additionally, the proposed rule would require employers to nullify any and all existing non-compete agreements within six months after the rule becomes final. And, employers would need to inform their affected employees that those non-compete provisions are no longer in effect. The proposed rule also makes it illegal for employers to enter into any non-compete agreement or suggest that a worker is bound by a non-compete when they are not. The proposed rule is broad and would not only apply to employees, but also to independent contractors, interns, volunteers and other workers.
For 60 days, the proposed rule will be open for public comment, at which point the FTC likely will move to make it final. The rule will become effective 180 days after the final version is published.
What makes the proposed rule controversial?
It is unclear whether the FTC has authority to pass such a sweeping rule. Whenever the rule becomes final, it could face legal challenges that may delay or prevent the rule from ultimately becoming final or being enforced.
To protect themselves in the event the rule does become final, employers should ensure their non-disclosure and confidentiality agreements are sound and sufficient to protect confidential information and trade secrets should an employee leave to work for a competitor. Employers also may want to consider using non-solicitation agreements, which do not appear to be impacted by the FTC’s proposed rule. Non-solicitation agreements can provide additional comfort that employees will not poach customers, suppliers, vendors or employees.
There is no need for employers to panic. However, while waiting for the FTC to make its next move, employers can and should ensure their other agreements are adequately protecting their legitimate business needs.