Broad Changes for Businesses on the Horizon as FTC Announces Proposed Rule Which Bans Non-Compete Agreements

DBL Law – Erin Shaughnessy FTC Announces Proposed Rule Which Bans Non-Compete Agreements

On January 5, 2022, the Federal Trade Commission (FTC) released a proposed rule which would ban non-compete agreements.  This proposed rule would create broad changes to how businesses operate in recruiting and retaining talent.  This move is unsurprising to many, as President Biden first promised to curtail non-compete agreements during his presidential campaign.  In July 2021, President Biden took the first steps towards fulfilling that promise when he issued an executive order encouraging the FTC to ban or limit non-compete agreements.  This was shortly after Lina M. Khan, a Biden-appointee, was confirmed and sworn in as Chair of the FTC.

The FTC estimates that 30 million Americans, one in five, are bound by a non-compete agreement.  A non-compete agreement is a contractual term, included in many employment contracts, which prohibits the employee from working for a competing employer or starting a competing business.  These agreements usually specify geographical and time limitations.  While these agreements are typically limited in scope and duration, the Biden administration and the FTC agree that these agreements result in decreased competition for workers, lower wages, and stifled entrepreneurship and innovation in businesses.

As such, the FTC has proposed a rule which would not only prevent employers from entering into non-compete agreements with employees moving forward, but which would also require employers to rescind existing non-competition agreements or clauses in existing employment contracts.  

The FTC has proposed a broad definition of the work “non-compete clause” under the proposed rule.  Under the rule, a non-compete clause would include not only a contractual term which would prevent an employee from seeking or accepting other employment or establishing or operating a business after an employment relationship had ended, but also de facto non-compete clauses that have this effect.  The proposed rule includes, as examples of de facto non-compete clauses, non-disclosure agreements that are written so broadly as to effectively preclude an employee from working in the same field after the conclusion of their employment or some contractual terms that would require an employee to pay the employer or a third-party for training costs if that employee terminates their employment within a specified time period.

The proposed rule as written also indicates that the FTC intends this rule to be widespread, applying not only to future non-compete agreements, but existing non-compete agreements as well.  Under the new rule, employers with non-compete clauses in existing employment agreements at the time the rule goes into effect will have to rescind those clauses or agreements.  Under the proposed rule, employers will be required to provide 45 days notice to all workers of the recission of such agreements. 

While the current proposed rule is not final yet, there is a good likelihood that the FTC will adopt this rule or some version of this rule in the near future.  The proposed rule is currently open for public comment, which generally lasts for 60 days.  Public comments submitted will be considered before the final rule is announced.

The full text of the proposed rule can be found here.