On January 5, 2023, the Federal Trade Commission interjected itself into U.S. workplaces in a big way, publishing a proposed rule that, as written, would essentially make it an “unlawful restraint on trade” for employers to restrict an employee’s right to engage in business activities competitive with the employer. While the FTC’s proposed rule is subject to a 60-day public comment period and may ultimately end up looking somewhat different when – or if — it becomes final, in its current iteration the rule would substantially upend the current policies and practices of many U.S. businesses.
What is a Non-Compete Clause under the Proposed Rule?
The FTC’s proposed rule defines “non-compete clause” as “a contractual term between an employer and 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 ban on non-competes is expansive, applying to “workers,” a term of art under the proposed rule that includes in addition to “employees,” any “individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
What is the Impact of the Ban on Non-Competes Proposed by the FTC?
With few exceptions, the proposed rule would make it an “unfair method of competition,” unlawful under Section 5 of the Federal Trade Commission Act for an employer to:
- Enter into or attempt to enter into a non-compete with a worker; or
- Maintain with a worker a non-compete clause.
In other words, to comply with the proposed rule, employers that have existing non-competes with workers would be required to “rescind the non-compete clause no later than the compliance date.”
How Quickly Could the Proposed Rule Go into Effect?
The FTC’s proposed ban on worker non-competes does not become effective immediately. Rather it is subject to a 60-day public comment period. After consideration of all public comments submitted, the FTC can publish and finalize the rule in its current form or with modifications, which may take the agency some time to do given the high volume of comments that is anticipated. As currently written, the FTC has proposed a compliance date of 180 days after a final rule is published in the Federal Register. Legal challenges to the FTC’s authority to implement a ban on employer non-competes are widely expected from business interest groups and other interested parties and may result in further delays in any implementation of a final rule.
What Steps Should Employers Be Considering Now?
What proactive steps should employers be considering? The FTC’s move to ban non-competes at the federal level accelerates dramatically a growing number of restrictions on the use of non-competes at the state level, including in Virginia, Maryland, and the District of Columbia. However, all may not be lost for employers. In proposing a ban on non-competes, the FTC made it clear that it does not consider “other types of restrictive employment covenants – such as non-disclosure agreements . . . and client or customer non-solicitation agreements . . .” unlawful, i.e., unfair methods of competition. The same holds true under current state laws in Virginia, Maryland and the District of Columbia.
Therefore, it is important for employers to consider their current reliance on, and future potential need to, restrict the ability of workers to engage in competitive activities both during and after termination of employment. For many employers, this should entail strengthening existing employee non-solicitation provisions and fine-tuning restrictions on confidentiality of business information, or implementing new ones where none are currently in place.
We will be providing more updates regarding the FTC’s proposed rule on non-competes. If you have questions about your current policies and practices to ensure compliance with existing Virginia, Maryland, or District of Columbia employment laws, please contact Doug Taylor, at firstname.lastname@example.org or (703) 525-4000.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.