Federal Trade Commission Proposes a Ban on Non-Compete Clauses in Employment Contracts

On January 5, 2023, the Federal Trade Commission (“FTC”) issued a proposed rule (“Proposed Rule”) which would ban non-compete clauses from employment contracts. The Proposed Rule bans non-compete clauses in contracts for employees and independent contractors. Should the Proposed Rule become a Final Rule, all employers who have entered into contracts with employees or independent contractors that include a non-compete clause will be required to rescind the non-compete clause no later than the compliance date. Employers also will be required to issue notices, which are individualized, to each employee or contractor that the non-compete clause is no longer in effect and may not be enforced against the employee or contractor. The employer will be required to issue this notice within 45 days after rescission of the non-compete clause. Notices need to be issued to current and former employees.

Although the Proposed Rule would ban non-compete clauses, the Rule would not generally apply to non-disclosure agreements (“NDAs”) or client or customer non-solicitation agreements because these covenants do not prevent a worker from seeking or accepting employment with a person or operating business after separation of employment. However, the FTC also outlines a functional test for determining whether a contractual term is a de facto non-compete clause, citing the following examples:

1. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
2. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

The Proposed Rule does not apply to individuals selling a business entity or selling a business entity’s operating assets if the person is an owner, member, or partner holding at least a 25% ownership interest in the business entity.

We will continue to monitor the progress of the Proposed Rule. Any questions, please reach out to any member of the Labor and Employment team listed below.