On January 4, the United States Federal Trade Commission (FTC) issued complaints against three employers alleging that they unlawfully imposed non-competition restrictions on employees, including low-wage workers, that barred the employees from seeking or accepting post-termination employment with a competing business. The complaints allege that the employers’ requirement that employees enter into these non-competition agreements constitutes an unfair method of competition and a violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, which prohibits unfair or deceptive acts or practices in or affecting commerce.
While this action was newsworthy on its own, the following day, the FTC dropped a bombshell, announcing a new rule that “would ban employers from imposing noncompetes on their workers,” which could, according to the agency, “increase wages by $300 billion per year and expand career opportunities for about 30 million Americans.”
The proposed rule, which will be open for public comment for 60 days, is premised on the FTC’s findings that noncompetition agreements are unfair methods of competition. According to FTC Chair Lina Khan, noncompetition agreements “block workers from freely switching jobs, depriving them of high wages and better wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” Chair Khan explained her position that “[b]y ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.” Although some employers may be surprised to see the FTC weighing in on noncompetition agreements, the agency has taken an increasingly visible role on employment-related issues during the current administration (see, e.g., our discussion of the FTC’s September 2022 announcement of its efforts to protect gig workers), contending that these actions are authorized by the agency’s consumer protection duties.
The FTC’s proposed rule would prohibit an employer from entering into (or attempting to enter into) a noncompetition arrangement with a worker. The rule defines a “non-compete clause” as not only an agreement between an employer and a worker (which, importantly, also includes independent contractors, interns, and even volunteers) that “prevents 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,” but also any agreement that has the functional effect of that sort of restriction. Thus, under the rule, a broad non-disclosure agreement that effectively precludes a worker from working in the same field after the conclusion of the worker’s employment also would be unlawful. So too would be an agreement between an employer and a worker that requires the worker to pay back training costs if the worker’s employment terminates within a certain period of time, where the costs are not reasonably related to those actually incurred by the employer. The only exception provided for in the proposed rule relates to non-competition arrangements entered into in connection with the sale of a business where the person restricted owns at least a 25% interest in the business being sold.
Notably, the rule would not only prohibit noncompetition agreements going forward, but would also invalidate any existing noncompetition agreements. In fact, the rule would require employers to provide notice to workers with existing noncompetition agreements that those agreements are no longer in effect and cannot be enforced against them.
Several states, most notably California, already prohibit employment-related non-competition agreements in most circumstances. Other states place limitations on the use of employment-related non-competes, such as Illinois’ limitation on their use with low-wage workers. Other states have joined a growing nationwide trend placing restrictions on the use of noncompetition agreements in employment (see, e.g., our discussion of recent Colorado legislation in this area). However, the proposed rule would create a national standard, as it expressly provides that it would supersede all state laws that are inconsistent with the rule.
As proposed, the rule would go into effect 180 days after the publication of the final rule. Extensive public comments are certain to be made, as is strident opposition to the proposed rule. We will continue to monitor and update as developments arise.