On January 5, 2023, the Federal Trade Commission (“FTC”) issued a notice of proposed rulemaking that would prohibit non-compete agreements between employers and employees.  The full draft of the proposed “Non-Compete Clause Rule” can be found here.

Specifically, the proposed rule would provide 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, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause. The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions. 

According to the FTC, “the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants 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. However, under the proposed definition of “non-compete clause,” such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”

In addition to prohibiting employers from entering into non-compete clauses with workers starting on the rule’s compliance date, the proposed rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date. The proposed rule would also require an employer rescinding a non-compete clause to provide notice to the worker that the worker’s non-compete clause is no longer in effect.  To facilitate compliance, the proposed rule would (1) include model language that would satisfy this notice requirement and (2) establish a safe harbor whereby an employer would satisfy the rule’s requirement to rescind existing non-compete clauses where it provides the worker with a notice that complies with this notice requirement.

The proposed rule would also clarify that the term “worker” includes an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.

The proposed rule would include a limited exception for non-compete clauses between the seller and buyer of a business.  This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in a business entity.

There will be a 60-day period during which the public will be allowed to submit comments on the proposed rule.  Following this period, the FTC would make the rule final and it would then go into effect 180 days after the date of publication. 

If finalized in its current form, the proposed rule would drastically impact employers and how they utilize restrictive covenants. Employers should be prepared to have an inventory of their existing restrictive covenants with current and former employees to ensure compliance if the rule should take effect. We will continue to monitor developments regarding the proposed rule and will keep you informed on any updates. 

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