Employment Law Update – FTC Looks to Ban Non-Competes, But Don’t Panic

    By Labor & Employment

    The Federal Trade Commission (FTC) rang in 2023 by zeroing in on a new target: non-competes. On January 5, the FTC announced a new proposed rule banning the use of non-compete provisions in agreements with individuals. This announcement came only one day after the Commission announced actions against three companies that had entered into non-compete agreements with their respective employees. The FTC took the position that the non-compete provisions violated Section 5 of the FTC Act (which bans unfair methods of competition) and are therefore invalid.

    Highlights of the Proposed Rule:

    • Non-compete provisions would be deemed an unfair method of competition and thus employers would be banned from using such clauses not only in agreements with employees, but also with other individuals like sole proprietors and independent contractors.
    • Employers would have to rescind existing non-competes and advise employees that those provisions are no longer in force.
      The rule would broadly define a “non-compete clause” as “a 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.”
    • The “functional test for whether a contractual term is a non-compete clause” would include other types of provisions that act as non-compete clauses by effectively prohibiting workers from seeking or accepting other employment after the end of the employment with the employer. As examples of such de facto non-competes, the proposed rule points to broad non-disclosure obligations that effectively prevent employment in the same field, or provisions that require an employee to repay the employer for training where the payment is not reasonably related to the costs the employer incurred.
    • The proposed rule includes an exception for non-compete clauses between franchisors and individual franchisees, which would remain subject to federal antitrust law and other applicable law, and a limited exception for the sale of a business where the seller held at least 25% ownership interest in the business entity.
    • Notably, the FTC acknowledges some of the issues business will have with the proposed rule by seeking comments on a number of specific topics, including whether franchisees ought to be covered by the rule; whether senior executives should be exempted from the ban or instead subject to a rebuttable presumption; and whether low wage and high wage workers should be treated differently. In short, the proposed rule poses more questions than it answers and will likely look very different in its final version.

    While the FTC’s rule banning non-competes would adversely impact employers, “Don’t Panic” as The Hitchhiker’s Guide to the Galaxy suggests. Whatever the rule eventually states, it is unlikely to be a practical issue for some time. The FTC is accepting public comments through March 10, 2023, and businesses, trade groups, and factions of Congress are sure to voice strong opposition to the proposed rule’s current broad scope. So, it is doubtful that the rule’s final form will be as sweeping as currently proposed. And, even when the rule goes into effect, detractors will undoubtedly file suit to challenge the FTC’s authority to implement the ban. Besides, in Virginia, we already have statutory restrictions on the use of non-competes for employees making less than approximately $70,000 (as of DOLI’s announcement on January 17, 2023). K&C’s Labor & Employment Team will closely monitor the situation as it develops.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.