Earlier this month, the Federal Trade Commission (FTC) voted 4-0 to extend its March 20th deadline for public comments on its controversial proposed rule to ban employee non-competition clauses (non-competes). The Commission will now accept comments until April 19, 2023.
The proposed Non-Compete Clause Rule, which the FTC announced in January following a 3-1 vote by the Commission, is based on a preliminary determination that non-competes constitute an unfair method of competition and thus violate Section 5 of the Federal Trade Commission Act.
The FTC estimates in the Notice of Proposed Rulemaking (NPRM) that the proposed rule would increase workers’ total earnings by nearly $300 billion per year and open doors for the approximately 30 million Americans who are presently subject to non-competes.
What Does the Proposed Non-Compete Clause Rule Do?
In short, the Non-Compete Clause Rule would make it illegal for an employer to do any of the following:
- Enter into or attempt to enter into a non-compete with a worker
- Maintain a non-compete with a worker
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete
The proposed rule defines a non-compete as “a contractual term between an employer and a worker 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.”
The reach of the proposed rule is sweeping. On its face, the Non-Compete Clause Rule does not prohibit other types of common restrictive covenants such as non-solicitation or confidentiality provisions, unless such a clause functions as a “de facto non-compete.” That is, the proposed rule leaves open the possibility that these other types of covenants could be invalidated as unfair methods of competition if they are so broad as to effectively block a worker from seeking or accepting work with another employer, regardless of the title assigned to the particular clause.
Additionally, the Non-Compete Clause Rule would apply to anyone who works for an employer, whether paid or unpaid, including independent contractors. The rule would require employers to rescind existing non-competes no later than the compliance date (i.e., 180 days after the date of publication of the final rule), and to advise their workers that these covenants are no longer effective.
Critically, the NPRM provides that the proposed rule would contain an express preemption provision such that it would supersede any inconsistent state statute, regulation, order, or interpretation. Thus, current state laws that allow non-competes would no longer be permissible.
What Alternatives to an Outright Ban on Non-Competes is the FTC Considering?
The NPRM seeks public comment on a broad range of issues related to the Non-Compete Clause Rule, including but not limited to the preemption provision and the proposed definition of non-competes. However, the FTC is also requesting comments on the pros and cons of potential alternatives to a categorical ban on non-competes.
These suggested alternatives fall into what the Commission has described as two “key dimensions” related to the rule’s design, namely:
- Adoption of a rebuttable presumption of unlawfulness regarding the use of a non-compete, which would allow the non-compete if an employer could meet a particular evidentiary burden, based on a standard to be articulated in the final rule; and/or
- Differentiated standards or exemptions for particular workers based on their job function, occupation, earnings, or other characteristics such that the rule would not apply to all workers uniformly
While acknowledging that “the number of potential alternatives to the proposed rule is nearly limitless,” the NPRM specifically discusses and seeks comment on four discrete alternatives to the proposed rule based on different permutations of these key dimensions.
What the Future for Non-Competes Looks Like
For the time being, the status of any nationwide policy on non-competition clauses remains in limbo.
Although we do not have the benefit of a crystal ball, the extended comment period, industry opposition, and alternatives presented by the NPRM are signs that a final rule from the FTC will probably not take the form of an uncompromising ban.
Moreover, whether the FTC truly has the authority to conduct this type of rulemaking remains a leading question. If any version of the proposed rule is ultimately implemented, it is almost certain to be challenged in the courts as regulatory overreach. That said, non-competition agreements have clearly piqued the interest of federal decisionmakers, and a federal law related to non-competes in some capacity seems possible, if not imminent.
Just weeks after the publication of the NPRM, the bipartisan “Workforce Mobility Act of 2023” was introduced in Congress. With certain limited exceptions, that proposed legislation would also ban the use of non-competes nationwide, and would authorize the FTC, Department of Labor, state attorneys general, and individual employees to bring civil actions against employers for the unlawful use of these clauses. However, this is the third attempted introduction of such a bill. Previous versions introduced in 2019 and 2021 did not make it to committee vote.
What Should Employers Do Now About Non-Competes?
Ultimately, the extension of the FTC’s public comment period gives employers some breathing room to consider and ready themselves for the potential impacts of any shift in the current legal landscape regarding non-competes.
Although there is no action that must be taken at this moment, employers who utilize restrictive covenants may be best served by taking practical steps now to ensure they are prepared to comply with new requirements that may arise in the coming months—whatever those may look like. Such steps could include a close review of all existing restrictive covenants with the support of legal counsel to ensure they are narrowly tailored to protect the employer’s legitimate business interests.
To date, the FTC has received over 18,500 comments on the proposed Non-Compete Clause Rule. Nevertheless, businesses that have not already done so may still consider submitting comments to the FTC during the extended comment period, particularly to the extent they possess data or real-world examples to back up their positions.
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