The Federal Trade Commission (“FTC”) made a splash yesterday, January 5, 2023, when it announced proposed rulemaking to eviscerate non-compete clauses in business.
A non-compete clause is an agreement between a business and a worker that prevents the worker from obtaining employment at a competing business or forming a competing business, typically for a period of time after departure and within a particular geographic region, which can be small or be worldwide. About 20 percent of American workers are bound by non-compete agreements.
The proposed rule would make non-competes unlawful. That is a business cannot require a non-compete and any existing non-compete agreements must be cancelled. The rule would allow States to provide workers with even greater protection if they choose to do so.
Here’s where it gets even more interesting. The FTC’s proposed rule applies not only to W-2 employees but to independent contractors as well. Stated differently, a company (even one owned by a single person) simply could not require its contractor or its employee – or seemingly even a volunteer – to sign a non-compete. An employer is a person that hires or contracts with a worker to complete work for the person. The proposed regulation is exceedingly broad and seeks to protect employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors that provide a service to a client or customer.
The proposed rule carves out an exception for non-compete clauses relating to the sale of a business or the disposal of all of a person’s ownership interest in a business but only under certain circumstances.
What’s the purpose behind this rule?
The impact of the proposed regulation may come as a shock to many, so it’s important to try to understand the FTC’s rationale. In justifying the proposed rule, the FTC notes that 20% of workers are subject to non-compete clauses which prevent them from leaving their current jobs for fear of not being able to work in the same type of business or in the same community, thus decreasing competition. The FTC believes that this reduced competition causes companies to keep compensation and benefits lower than they might otherwise be. Moreover, the FTC believes that non-competes stifle entrepreneurship and innovation.
The FTC estimates that the proposed regulation could increase workers’ earnings jobs by at least $250 billion per year. Research also suggests that prohibiting non-competes could begin to close America’s race and gender wage gaps.
How to deal with existing non-competes?
The proposed regulation makes it clear that existing non-competes will become unlawful and must be rescinded. It would require companies to notify workers about their becoming free from any non-compete in writing. The FTC provided model language that may be used to notify workers of this change.
What should companies do now?
First, be ready for change. If the rule is enacted as written, it immediately will be important to know which of your workers have a non-compete, so now’s the time for business owners and HR professionals to do that research. Contacting legal counsel is a very important step to determine if non-competes can be lawfully replaced with other sorts of restrictive provisions and how to do so – and whether it makes sense to do so now!
It’s also critically important to reconsider policies relating to the protection of trade secrets and other confidential information.
As a reminder, this is only a proposed rule. The FTC welcomes public comments on their proposal. Comments must be submitted within 60 days after the Federal Register publishes the FTC’s proposal. After its analysis and review of the comments, the FTC will publish a final rule. Compliance with the final rule will be required 180 days after its publication.
Rest assured, we’ll be watching this one closely and reporting on developments. Let us know if you have questions or if you want to comment. We’re always here to help, and we’ll be happy to walk you through strategic approaches to this developing issue.