On January 5, 2023, the United States Federal Trade Commission (FTC) proposed a new rule to ban employers from enforcing non-compete clauses on employees and invalidate all existing non-competes that are in effect. The rule is expected to impact over 30 million American workers under a non-compete, or one in five U.S. employees.
Although the proposed FTC ban will affect a large volume of U.S. workers, there are some exceptions to the rule, as well as a caveat to what qualifies as a “non-compete.” The following highlights the proposed ban.
The FTC’s new rule plans to prohibit employers from taking three specific actions and requires them to complete two more specific steps:
If the ban goes into effect, employers will be prohibited from:
- Entering into or trying to enter into a non-compete with an employee
- Maintaining an existing non-compete with an employee
- Representing to an employee that they’re subject to a non-compete
Along with these restrictions, employers will have to complete these steps if the ban goes into effect:
- Rescind existing non-compete agreements within 180 days of the final rule’s publication
- Notify current and former employees that their non-competes are no longer in effect
The FTC describes this as an effort to provide employees with more freedom to find higher-paying jobs with better conditions rather than being stuck in a role due to a non-compete.
Who It’ll Impact
Since the rule would apply to any person working with or for an employer, be it paid or unpaid, it’ll affect nearly all workers and employers who’ve enforced non-compete agreements. Whether you’re a full-time employee, independent contractor, intern, volunteer, or even a sole proprietor who provides services to a client or customer, this rule includes you, due to the broad definition of “Employer”: “a person that hires or contracts with a worker to work for the person.”
However, there’s an exception to the rule. The FTC’s proposed ban excludes franchisees in the context of a “franchisee-franchisor relationship,” but employees of a franchisee or franchisor are still “workers” covered under the rule. In other words, non-competes will be allowed between franchisees and their franchisors, but employees of either will still be covered by the rule.
The proposed rule also contains an exception for the sale of businesses. More specifically, non-competes entered into by a person selling a business won’t be affected by the ban. The exception strictly applies to individuals with a “substantial” ownership stake of at least 25%.
What Qualifies as a Non-Compete?
While the proposed FTC ban doesn’t prohibit other contracts, such as non-solicitation, confidentiality, and nondisclosure agreements, it does contain a “test” for any contracts that act as “de facto non-compete clauses.” In other words, items such as nondisclosure agreements and training cost repayments are included in the ban if they have the effect of restricting an employee from seeking or accepting work with another employer.
Potential Employer Struggles
If the rule goes into effect, employer compliance with new rescission provisions and notification requirements will be the most daunting task.
Notifying current and former employees that their non-competes are no longer in effect, especially through individualized communication, will take substantial time and resources. Not to mention revisiting other employment agreements such as nondisclosure and training cost repayment clauses.
While some experts see the proposed rule as unlawful, citing the role of non-competes in “fostering innovation and preserving competition,” it’s clear that the FTC is employee-focused in this decision.
Many employers view non-competes as being instrumental in leveling the competitive playing field. However, many, such as the FTC believe the agreements keep workers from taking jobs with better pay, accommodations, and growth opportunities.
Time will tell whether the rule is formally adopted, but the rule could be finalized by the end of 2023 if approved by the FTC.
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Experienced Employment Law Attorney, Mediator, Arbitrator, Investigator, Legal and Media Commentator
Twice-named a U.S. News Best Lawyer in America for employment and labor law, Angela Reddock-Wright is an employment and labor law attorney, mediator, arbitrator, and certified workplace and Title IX investigator (AWI-CH) in Los Angeles, CA. Known as the “Workplace Guru,” Angela is an influencer and leading authority on employment, workplace/HR, Title IX, hazing, and bullying issues. Furthermore, she’s been named a “Top 50 Woman Attorney” in California by Super Lawyers, a “Top California Employment Lawyer” by the Daily Journal and one of Los Angeles’ “Most Influential Minority and Women Attorneys” by the Los Angeles Business Journal.
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