Updated June 5, 2023
The Federal Trade Commission (“FTC”) issued a proposed rule that would broadly ban the use of noncompete agreements between employers and their workers. In addition to the proposed rule, the FTC is cracking down on companies that are abusing noncompetes, including filing complaints against companies requiring low-wage workers to sign noncompetes.
Proposed Noncompete Ban: FAQ
We’ve prepared the FAQ below to help you understand how this proposed noncompete ban could affect your business and employees:
What is the New Proposed Rule?
The rule is a broad-based ban on the use of noncompetes in the employment context. The rule makes no exception for high-level employees or employees with access to trade secrets or highly sensitive information. The only exception is for noncompetes with some sellers of a businesses.
Does the New Rule Apply to Other Restrictive Covenants, such as Nondisclosures, Customer Nonsolicits, and Nonrecruitment Covenants?
The exact scope of the rule is not clear yet. In addition to banning noncompetes, the rule prohibits “de facto” noncompetes, or contractual provisions which prevent or have the effect of preventing an employee from working elsewhere after his/her employment ends. The rule provides the following examples of de facto noncompetes:
– Non-disclosure agreements which are so broad that they prevent an employee from working in the same field elsewhere; and
– Training repayment provisions which require the worker to repay training costs if the worker leaves within a certain time period and if the obligations are not reasonably related to the costs the employer incurred in training the worker.
These examples suggest narrowly tailored customer nonsolicits, nonrecruits, and nondisclosures will not be impacted by the ban.
Is the FTC’s Ban Already in Effect?
No. The timing of the issuance of the final rule is uncertain.
Like all rules issued by regulatory agencies, the FTC’s proposed rule went through a “notice and comment” period. During this 60-day period, various stakeholders and members of the public submitted feedback or comments on the proposed rule. The comment period ended on April 19, 2023. At some point, the FTC will likely issue a final version of the rule, which could differ from the language of the proposed rule. While it could be any day, there are some reports saying that it may not be until 2024.
What Happens to Existing Noncompetes?
The proposed rule would require employers to rescind any existing noncompetes and to notify their workers and former workers that their noncompetes are no longer in effect. The deadline to do so would be within 180 days of publication of the final rule.
If the proposed rule takes effect, employers should seek legal guidance to determine which provisions must be rescinded and how to properly accomplish the rescission.
How do the FTC’s Actions Affect my Business and my Employees? What do I need to do?
The FTC’s proposed ban has not taken effect. Employers can thus enforce noncompetes consistent with existing state law.
However, given the FTC’s recent crackdown on noncompete abuse, and regardless of whether the FTC’s proposed ban takes effect, now is the time for employers to reevaluate their noncompete agreements to ensure they are using them appropriately.
In general, employers should avoid asking rank-and-file or low-wage workers to sign noncompete agreements. Employers should also make sure that their noncompetes are as narrowly tailored as possible and that noncompetes are only being used to protect legitimate business interests, not to stifle competition or employee mobility.
Employers should also evaluate if their other restrictive covenants are sufficiently robust and will protect their business if a noncompete ban goes into effect. BFV is available to assist in reviewing and strengthening customer and employee nonsolicits and confidentiality agreements.
Lastly, employers should review the steps they are taking to protect their trade secrets and other sensitive or confidential information. Federal and state trade secret law will be unaffected by the potential ban, and trade secret remedies will take on a more significant role in preventing unfair competition by departing employees. BFV is available to advise on how to protect your business’s confidential information and trade secrets and mitigate the impact of the proposed ban.
Is the FTC Allowed to Regulate and Ban Noncompetes?
This is a good question. The Supreme Court has recently reined in the authority of agencies to regulate in areas that materially impact the economy in the absence of clear congressional authorization. Once the final rule is issued, it will almost certainly be challenged as beyond the FTC’s authority. There will thus be lingering uncertainty about the validity of the rule.
As always, BFV will be monitoring the progress of this rule closely. We will keep you apprised of any important updates or changes. In the meantime, we are available to assist you or your business in navigating these potential upcoming changes.
“Minnesota Becomes Fourth State to Ban Noncompetes” (May 26, 2023)
BFV featured in WSJ article, “FTC Proposes Banning Noncompete Clauses for Workers” (January 5, 2023 – subscription required)