On January 5, 2023, the Federal Trade Commission (FTC) proposed a new sweeping rule banning employers from imposing non-compete agreements on their employees. If implemented, the proposed rule would nullify most existing non-compete agreements and ban new ones, releasing millions of U.S. workers from the restrictive contracts.
Scope of The Proposed Rule
The proposed rule is near-absolute, superseding state laws that are less protective of the employee. It applies to almost all types of employers and workers, including independent contractors, interns, and volunteers. It contains no exception for highly paid workers and senior executives and targets not only clauses that expressly prohibit competition but also broad non-disclosure and non-solicitation provisions, clauses requiring workers to pay damages to their former employers if they work for a competitor, and other arrangements have “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.”
Non-competes in Business Sales
Non-compete agreements in business sales are also in FTC’s sights. A proposed exception would exclude non-compete clauses between a seller and the buyer of a business so long as the party restricted is an owner, member, or partner holding at least 25% ownership interest in the business.
Timing of the Final Rule
FTC received nearly 27,000 comments on the draft rule, garnering support from labor and advocacy groups and opposition from industry groups. The comment period closed on April 19, 2023, and a vote on the final version is expected next April. Employers will have 180 days after publication of the final rule to comply and rescind existing non-compete clauses by providing formal written notice of rescission to both existing and former employees bound by non-compete clauses.
Existing Laws Restricting Non-compete Agreements
D.C., Virginia, and Maryland (as well as several other states) have already implemented laws restricting the use of non-compete agreements. DC has outright banned most non-compete restrictions and anti-moonlighting policies with very limited exceptions for highly compensated employees (earning $150,000 a year or $250,000 a year for medical specialists, which includes commissions, bonuses, and vested stock, but not fringe benefits) and certain types of outside employment. Virginia and Maryland banned non-competes for workers below a certain wage threshold ($1,343 or less per week in Virginia, and $19.88 or less per hour generally and $19.20 per hour for small employers in Maryland).
If the FTC proposed rule is enacted, it would preempt and supersede any state law inconsistent with the final rule, unless state law provides greater worker protections. At this point, it is hard to predict the scope of the FTC rule as it will likely be subject to significant legal challenges.
All these legislative actions make it clear that changes in the restrictive covenant landscape are inevitable. For now, employers in many states can still use non-compete agreements. However, they are under increasing scrutiny. Employers and businesses relying on non-compete clauses and other restrictive covenants should use this year to examine the existing agreements and evaluate their enforceability. A “one size fits all” agreement is unlikely to work for employers with workers residing in several states. They should also keep track of the non-competes put into effect over the next several months and
