FTC Proposes Rule Banning Non-Compete Clauses

On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to ban non-compete clauses in employment agreements, which it asserts hurts workers and harms competition. The proposed rule would prevent employers from using non-compete clauses with employees and would require employers to rescind any existing non-compete clauses within 180 days of the publication of the final rule.

The Proposed FTC Rule 

The proposal is written broadly, prohibiting any “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.”

This provision is essentially a functional test to determine if a contractual term is a non-compete clause, even if that specific wording is not used. However, if the proposed rule is finalized, it would not affect the enforceability of non-disclosure clauses, non-solicitation clauses, and other similar agreements that prevent employees from using confidential information against a former employer.

State Laws Covering Non-Compete Agreements 

Virginia already has a law that restricts the use of non-compete agreements with certain employees. Section 40.1-28.7:8 of the Virginia Code prohibits employers from entering, enforcing, or threatening to enforce a non-compete with any low-wage employee. The statute broadly defines “low-wage employee” to encompass those whose average weekly earnings are less than the state average weekly wage as well as interns, students, apprentices, certain trade trainees, and certain independent contractors.

Virginia is not the only state to enact legislation regarding non-compete agreements. A review of state laws across the nation indicates that state legislatures are limiting the use of non-competes. Several states, including Maryland and Washington, D.C., have enacted laws similar to Virginia’s, prohibiting non-competes for low-wage employees. Other states have codified the common law trend of allowing non-competes as long as the agreement is not too broad in its geographic scope and duration. Other states, such as North Carolina and Tennessee, have laws limiting non-compete agreements in the context of certain professions (typically attorneys and health care providers).

When Will the FTC Rule Take Affect? 

The rule has no effect yet, as it is only a proposal. Further, if the proposed rule is finalized exactly as it is currently written, it likely will face legal challenges. Commissioner Wilson, one of several FTC commissioners, wrote a dissent to the notice of proposed rulemaking in which she pointed out the rule as proposed may exceed the agency’s authority, and many other legal authorities agree.

What Happens Next? 

The FTC invites the public to submit comments regarding the proposed ban on non-compete clauses, and may take those submissions into consideration before releasing a final rule. Additionally, the FTC invited comments on possible alternatives to the ban, which could include treating non-compete clauses for senior executives differently than for other employees or giving job candidates advance notice that a position will require signing a non-compete agreement. The agency’s request for alternative ideas may signal that it is open to scaling back the scope of its final rule.

Interested or impacted parties might consider leaving feedback at the link below, as the final rule could be directly affected by responses the FTC receives, and it is likely the only time that employers will be able provide input on this significant change to the American employment landscape. The comment portal is located on the FTC’s website and is open to the public through March 10, 2023.

If you have any questions about how this proposed rule may impact your business, the WRVB Labor & Employment attorneys are available to assist you.