CSG Law Alert: FTC Set to Strike Down Existing and Future Non-Compete Clauses
On January 5, 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that would prevent employers from entering into non-compete clauses with workers and require employers to rescind existing non-compete clauses.1 Because it is federal law, the proposed rule would supersede any state law or regulation that would contradict or would otherwise be inconsistent with the proposed rule.2
In its current form, the proposed rule bans most non-compete clauses:
It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.3
The proposed rule defines a non-compete clause as “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.”4 The proposed rule broadly includes within the definition of an employer any natural person, partnership, corporation, association, or other legal entity “that hires or contracts with a worker[.]”5 The proposed rule broadly defines a worker as “a natural person who works, whether paid or unpaid, for an employer,” which expressly includes the following persons who provide a service to a client or customer: employees; an individual classified as an independent contractor; externs; interns; volunteers; apprentices; and sole proprietors.6 Notably, however, the rule explicitly permits a covenant not to compete in the context of the sale of a business.7
Under the proposed rule a contractual term is deemed a non-compete clause if “it has the effect of prohibiting 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.”8 Irrespective of what the agreement is titled or how the language may be phrased, the proposed rule would prohibit and negate any contractual language that would otherwise limit a worker’s ability to find and secure their subsequent position of employment. The proposed rule focuses on what the clause does and its effect on the employee, rather than how it is defined in the applicable agreement.
Further, the FTC distinguished non-competes from non-solicitation provisions, which are typically used to prevent workers from recruiting their employer’s employees, customers, and/or vendors.9 To this end, the FTC recognizes that non-solicitation provisions “generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer,” whereby such provisions would not fit the criteria of a non-compete clause.10 However, if such provisions fall within the criteria established by the proposed rule and have the effective of restricting a worker’s future employment, such contractual language may be barred.11
For employers, the requirements of the proposed rule would impact both future and existing contractual agreements containing non-compete clauses. The proposed rule specifically requires that an employer rescind an existing non-compete clause entered into between an employer and worker no later than the compliance date.12 Within forty-five (45) days of rescinding the non-compete clause, an employer must provide individualized notice to the current or former employee that the non-compete clause is no longer in effect and may not be enforced against the worker.13 The proposed rule provides model language for employers to use for such a notice, but employers are free to use different language so long as the employer effectively communicates that the worker’s non-compete clause (a) is no longer effective and (b) may not be enforced by the employer.14 15 The proposed rule contains a safe harbor, whereby an employer will be deemed to have complied with the recission requirements if the employer provides individualized and adequate notice to the worker.16
Procedurally, the proposed rule is subject to public comment, whereby the FTC will consider such comments in making potential changes and rendering its final rule. The public comment period will be open soon and will be due sixty (60) days after the Federal Register publishes the proposed rule. The compliance date in which employers will be required to comply with the final rule will be one hundred eighty (180) days after issuance of the final rule. If the proposed rule is adopted in its current form, it will likely be challenged in court (probably on grounds that the FTC has overstepped its authority and that a new statute is needed to enact the new rule), which could create uncertainty as to when and how such requirements may take final form and effect.
Best practices for employers if the rules are adopted
- Review and amend contractual agreements with workers (as defined in the rule) containing non-compete clauses;
- Prepare individualized, particularized and timely notice for each worker (either current or former) advising that the non-compete clause is no longer in effect and may not be enforced;
- Review and revise non-solicitation provisions to ensure that such provisions do not have the effect of preventing or restricting a worker from competing against the employer.
Contact your CSG counsel to take action in anticipation of the adoption of the proposed rule and to submit comments to the FTC for consideration. Chiesa Shahinian & Giantomasi PC will continue to track this proposed rule and provide updates. If you have any questions about taking steps relating to this rule and/or responding to employee concerns, please feel free to reach out to your CSG attorney or the authors of this alert.
1 Non-Compete Clause Rulemaking, Fed. Trade Comm’n (Jan. 5, 2023); Notice of Proposed Rulemaking, Fed. Trade Comm’n (last visited Jan. 6, 2023).
2 See proposed§ 910.4.
3 See proposed§ 910.2(a).
4 See proposed § 910.1(b)(1).
5 See proposed § 910.1(c); see also 15 U.S.C. 57b-1(a)(6).
6 See proposed § 910.1(f).
7 See proposed§ 910.3.
8 See proposed § 910.1(b)(2).
9 See Notice of Proposed Rulemaking at 4.
12 See proposed § 910.2(b)(1).
13 See proposed § 910.2(b)(2).
14 See proposed§ 910.2(b)(2)(C).
16 See proposed§ 910.2(b)(3).