The FTC Proposes Rule to Ban Noncompete Clauses for all US Workers

On January 5^th, 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that would ban employers from imposing either existing or prospective noncompete clauses on their employees. The proposed rule covers all employees regardless of industry or employer size, with minor exceptions in the sale of a business. The proposal is subject to a 60-day public comment period commencing when the FTC publishes the proposed rule. You can find the text of the proposed rule here.

The FTC’s Proposal

As stated above, the FTC’s proposed rule applies to all employees and to all noncompete clauses or agreements, whether prospective or existing. The rule would require employers to rescind all existing noncompete clauses and inform both former and current workers that their noncompete clauses are no longer in effect. This recission would be required to occur no later than 180 days after the FTC’s final rule is published. The only exception to the ban permits noncompete clauses entered into by a person who is selling a business or disposing of an ownership interest in a business entity in which the individual holds at least a 25% interest.

Although the proposed rule does not put an outright ban on other restrictive covenants, such as non-solicitation or no-hire provisions, it does ban “de facto” noncompete clauses that are “written so broadly that it effectively precludes the worker from working in the same field.” The proposed rule would overrule any state statute, regulation or order that is inconsistent with the rule.

Takeaways

The FTC’s proposal would be a sea change for restrictive covenants in employment. Employers need to be wary of the proposed rule’s ban on “de facto” noncompete clauses, as it is not clear by the FTC’s proposed rule what type of agreements and clauses this could entail. However, there is still time for comment on this rule until 60 days after the FTC’s publication of the proposed rule. Interested parties may file a comment online at https://www.regulations.gov, or on paper by mailing the comment to Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580. Given the potential impact of this rule on employers’ existing and prospective restrictive covenants, employers should contact counsel to determine the agreements and clauses that could be at risk.

If your business has any questions on this or any other matters, please do not hesitate to contact the attorneys at The Royal Law Firm at 413-586-2288.