FTC Proposes Rule to Ban Noncompete Clauses

The Federal Trade Commission (FTC) is proposing a new rule that would prohibit employers from using noncompete clauses.

The proposed rule would make it illegal for an employer to enter into, attempt to enter into, or maintain a noncompete with a worker, and to represent to a worker that they are subject to a noncompete.

The proposed rule would apply to both employees and independent contractors, and would require employers to rescind existing noncompetes and inform workers that they are no longer in effect.

The proposed rule would not apply to other types of employment restrictions, such as non-disclosure agreements, but could apply if they are so broad in scope that they function as noncompetes.

The FTC is seeking public comment on the proposed rule and will review the comments before issuing a final rule. The comment period is open until March 10, 2023.

What does it mean?

It's estimated that over 30 million workers, or 18% of the U.S. workforce, are required to sign a noncompete agreement before accepting a job.

If the proposed rule is implemented, companies would be required to cancel all existing noncompete agreements and inform current and past employees of the cancellation.

Labor and employment attorney Michael Schmidt of Cozen O'Connor in New York said, "the federal government is taking this action broadly, with practically no exception."

This means that the impact of the ban will be felt by companies with employees governed by noncompetes, as well as companies looking to hire workers bound by non-competes.

The public comment period for the proposed rule is open until March 10, and the Federal Trade Commission will review all submissions and make changes accordingly.

However, attorney Schmidt warns that this rulemaking process could take up to a year, or even longer if it is challenged in court.

What employees should do now?

Workers who have been impacted by noncompetes should submit comments to the FTC on the proposed rule, Farley advised.The comment period is open through March 10 and the FTC will review each submission and make changes based on that feedback."The more people who submit comments, the better," she said.

What employers should do now?

Companies should also take advantage of the FTC's 60-day comment period and "let their voices be heard," Schmidt advised.

This is meant to be a "constructive process," Dryden said. "If you think this will do harm to your legitimate business, submit comments to the FTC explaining your thoughts."

"I wouldn't be surprised if the FTC ends up scaling back this regulation," he added.Still, "there was clearly momentum building toward this," Dryden said.

In fact, many states already have limitations on noncompete agreements and it's not surprising the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition.

It's too early for businesses to take any drastic action, but companies should be mindful that's a real risk," Dryden said.