On January 5, the Federal Trade Commission (FTC or Commission), an agency charged with enforcing federal antitrust laws and protecting competition, proposed a new rule that would prohibit “employers” from imposing non-competes on “workers.” The proposed ban would make it illegal for employers to enter into or attempt to enter into  non-compete agreements with workers, continue to maintain such agreements if they already exist, or represent that a worker is subject to a non-compete. It would further require companies with active non-competes to inform workers that they are void. Under the proposed rule, the ban would prohibit non-competes that bar workers from accepting competing employment or starting a competing business.

The proposed rule broadly defines the terms “employers” and “workers.” An “employer” is defined as “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of state law, that hires or contracts with a worker to work” for the employer. However, an employer may not be subject to the proposed rule if the employer is engaging in an action protected by the state action doctrine or is an entity that is exempted from coverage under the FTC Act (e.g., certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, persons subject to the Packers and Stockyards Act of 1921, and nonprofit organizations). A “worker” is also defined broadly as “any natural person who works, whether paid or unpaid, for an employer,” including independent contractors; externs; interns; volunteers; apprentices; sole proprietors providing a service to a client or customer; and gig economy workers, such as rideshare drivers. While “worker” does not include a franchisee in the context of a franchisee-franchisor relationship, it does include a natural person who works for the franchisee or franchisor.

The proposed rule would exempt non-compete agreements that a person entered into in connection with the sale of a business, but only if that person owned 25% or more of that business. Other non-competes with workers, even those with senior executives and other key employees, would be banned.

The rule is a response to President Biden’s 2021 Executive Order that encouraged the FTC to exercise its statutory authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The rule is the FTC’s proposal to cure what the Commission calls a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” The Commission will accept public comments on the proposed rule for 60 days after official publication and consider those submissions before it issues a final version of the rule.

The FTC is also looking to prohibit other employment provisions under the rule that have the same effect as a non-compete, referring to such provisions as “de facto” non-compete agreements. That could include, for example, non-disclosure or confidentiality agreements; client or customer non-solicitation agreements; no-business agreements prohibiting the worker from doing business with the employer’s former clients or customers; no-recruit agreements; and training repayment agreements requiring a worker to repay training expenses if a worker leaves a company within a certain time.

The Commission voted 3-1 along party lines to publish the Notice of Proposed Rulemaking. Commissioner Wilson, the lone defector, issued a written statement saying that the agency would be departing “from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable,” and instead is proposing a near-blanket ban on the practice. She also questioned whether the agency has the authority to issue the rules, referencing a recent Supreme Court opinion that limits the Environmental Protection Agency’s authority.

Not surprisingly, pro-employer groups, such as the U.S. Chamber of Commerce, also criticized the proposal, saying the FTC lacks authority to issue the rule and ignores the benefits of non-competes. Sean Heather, U.S. Chamber senior vice president for International Regulatory Affairs and Antitrust, issued a statement saying, “Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”

Employers would be required to comply with the new rule within six months of the final version being published, although potential legal challenges could possibly delay that timeframe.

If you have any questions about the proposed rule and how it could affect your business or would like assistance in preparing a public comment, please contact the authors.