The Federal Trade Commission (FTC) announced a proposed rule last week to prevent employers from entering non-compete agreements with almost all workers. Additionally, the rule would require employers with existing non-compete agreements to rescind the agreement and notify current and former workers of the rescission.
Who is covered?
Employer is very broadly defined as “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of State law,” “that hires or contracts with a worker to work.”
Worker is any person works, paid or unpaid, for an employer. It includes employees, independent contractors, externs, interns, volunteers, and apprentices.
The proposed rule provides limited exceptions when the worker is a substantial owner, partner, or member of the business.
What are non-compete clauses?
Under the proposed rule, a non-complete clause is a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment or operating a business after employment with the employer ends.
The proposed rule also provides a functional test for determining whether a contractual term is a non-compete clause: if the term has the effect of prohibiting the worker from seeking or accepting employment, it is a de facto non-compete clause
Examples:
- Non-disclosure agreements that are so broad that they effectively prevent workers from working in the same field.
- Requirements for workers to pay the employer or third-party for training costs if the employment is terminated within a specified period, unless such requirement is reasonably related to the costs incurred by the employer.
Why did the FTC propose this rule?
The FTC estimates this rule banning non-compete clauses could increase wages by almost $300 billion per year and expand career opportunities for about 30 million (about one in five) American workers. Additionally, the FTC cites evidence that non-compete clauses harm consumers by hindering competition and innovation.
What’s next?
The public is invited to provide comment on the proposed rule for 60 days from when it is posted on the Federal Register. After the public comment period, the FTC can publish a final rule, which would become effective 180 days after its publication. Several analysts anticipate legal challenges to the proposed rule, including questioning the FTC’s authority to issue such a ban on non-compete clauses.
Takeaway
The proposed rule would effectively ban almost all non-compete agreements between employers and workers. Employers should consider taking stock of current non-compete agreements and other policies or terms of employment that could potentially be considered de facto non-compete clauses. Compliance could present a significant burden on employers should the rule become final, since it would require not only rescinding such restrictions but also providing notification current and former workers (including independent contractors, interns, volunteers, etc.).