January 13, 2023

The Federal Trade Commission (FTC) issued a proposed rule that would ban noncompete agreements between employers and workers, void current noncompete agreements, and supersede relevant state laws. Noncompete agreements block people from working for a competing employer, or starting a competing business, for a period of time after their employment ends. According to the FTC, noncompete clauses affect about one in five American workers, or approximately 30 million people. Currently, only three states (California, North Dakota and Oklahoma) prohibit employers from enforcing noncompetes.

The proposed rule seeks public comment on several topics by March 10, 2023, including whether:

• Senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban
• Franchisees should be covered
• Low- and high-wage workers should be treated differently

The FTC may revise its proposal before publishing the final rule, possibly later in 2023, and the rule would take effect 180 days after publication in the Federal Register. Pushback on the proposal has been swift, with employer organizations, such as the US Chamber of Commerce, questioning the authority of the FTC to “outright ban noncompete clauses in all employer contracts.” The final rule likely will be challenged in court.

Background

The Federal Trade Commission Act (FTCA) gives the FTC broad authority to regulate anti-competitive business practices, with some exceptions for banks, insurance companies, nonprofits, transportation and communications common carriers, air carriers, and certain other entities. In addition to the proposed rulemaking, a Nov. 10, 2022 FTC Policy Statement outlined plans to expand its enforcement authority, following President Biden’s July 9, 2021 Executive Order on promoting competition and increasing the FTC’s scrutiny of anti-competitive practices. Demonstrating this increased scrutiny, one day before the FTC issued the proposed rule, it announced enforcement actions against three companies it claims illegally imposed overbroad noncompete restrictions on security guards and glass manufacturing workers, in violation of the FTCA.

Highlights of the proposed rule

The proposed rule includes the following provisions and guidance:

• A noncompete clause is “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 with the employer.” 
• “Workers” covered under the proposed rule include interns, volunteers, independent contractors, gig economy workers and apprentices. 
• Employers would still be allowed to use confidentiality agreements and nondisclosure agreements during an individual’s employment, and customer nonsolicitation agreements — as long as they are not unusually broad, according to the proposing release. A “functional test” would determine if the terms of other types of agreements fall within the noncompete definition because they may prevent workers from seeking or taking employment with another employer. 
• An exemption would allow noncompete agreements between seller and buyer in the sale of a business where the owner, member or partner has 25% or more ownership interest in the business. 
• The proposed rule does not include any grandfathered arrangements, and employers would have to rescind current noncompete clauses by the compliance date (currently, this would be 180 days after the rule is published in the Federal Register). Employers would have 45 days from the date of rescission to notify each employee in writing — including former employees for whom the employer has readily available contact information — that their noncompete clause is no longer enforceable. Employers that use the FTC’s proposed model notice language would benefit from a safe harbor.
• The proposed rule invites comments on four alternative provisions: (1) ban on some workers and a rebuttable presumption of unlawfulness for other workers; (2) ban for some workers and no impact on other workers (including executives and other “highly paid or highly skilled” workers); (3) rebuttable presumption of unlawfulness for all workers; and (4) rebuttable presumption of unlawfulness for some workers and no impact on other workers.

Related resources

• Federal Trade Commission Act (FTC)
• Noncompete clause rulemaking (FTC, Jan. 5, 2023)
• FTC cracks down on companies that impose harmful noncompete restrictions on thousands of workers (FTC, Jan. 4, 2023)
• Policy statement regarding the scope of unfair methods of competition under Section 5 of the Federal Trade Act (FTC, Nov. 10, 2022)
• Executive Order on promoting competition in the American economy (The White House, July 9, 2021)