FTC Proposed Ban on Non Compete Agreements

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would ban, and require the recission of, most employer non-compete clauses. The proposed rule broadly defines non-compete clauses, potentially including agreements such as non-disclosure and confidentiality agreements that “[prohibit] 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.”

The FTC believes that non-competes are exploitative practice that suppress wages, hamper innovation, and block entrepreneurs from starting new businesses. The FTC expects the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for roughly 30 million Americans.

The proposed rule derives from Section 5 of the FTC Act, which prohibits unfair methods of competition. Because non-competes can prevent employees from freely switching employment, workers are deemed to be deprived of the opportunity to earn higher wages while the talent pool is also diminished. The rule would prohibit employers from: entering or attempting to enter into non-compete agreements with workers; maintaining a non-compete with workers; and representing to workers that the worker is subject to a non-compete. The rule extends to independent contractors or anyone who works for an employer, whether paid or unpaid (e.g., externs, interns, volunteers, apprentices, and sole proprietors). Likewise, there is no exception for senior executives or other highly skilled or paid workers. Employers will also be required to rescind existing non-competes and actively inform workers that they are now ineffectual. Currently, the only proposed exception to the non-compete ban is for agreements entered into in connection with the sale of a business, but still limited to those individuals who hold a twenty-five percent or greater ownership interest in the business being sold.

The public comment period for the proposed rule runs for 60 days, which ends March 10, 2023. The FTC will then consider comments, analyze the decision, and may then issue the final rule. The proposed rule is unprecedented and a further expansion of FTC regulation of competition, which will impact thousands of employers. Thus, strong opposition during the public comment period should be expected along with final judicial challenges if the proposed rule were to become final by the year’s end.

The FTC has already began to act against Michigan companies for using ‘coercive non-competes’ against low wage employees.¹

If you have questions about how this new rule may impact your business or if you’d like your HR policies to be reviewed in light of this potentially dramatic change in the law, please feel free to reach out to Lindsey Johnson, Matthew Schenk, or Jim Allen at Schenk & Bruetsch PLC

¹ https://www.ftc.gov/system/files/ftc_gov/pdf/2210026prudentialsecuritycomplaint.pdf