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On Jan. 5, 2023, the FTC proposed a new rule that would prohibit employers from imposing non-compete agreements on their workers.
The new rule would apply to new and existing non-compete agreements. The new rule would make it illegal for an employer to attempt to enter into a non-compete agreement with an employee, maintain an existing non-compete agreement, or advise an employee that it is subject to a non-compete agreement. The proposed rule would require employers to rescind existing non-compete agreements and to actively inform employees that existing non-compete agreements are no longer in effect.
The proposed rule would not affect other types of employment restrictions, such as non-disclosure agreements or non-solicitation agreements, unless such restrictions are so broad that they are de facto non-compete agreements. This will likely be an area of extensive interest because it is unclear at this point what will actually constitute a de facto non-compete.
The proposed rule includes an exception allowing non-compete agreements with “substantial owners”, ”substantial members”, or “substantial partners” of businesses who sell all or part of their ownership interest. The proposed rule defines a “substantial” owner, member, or partner as a person who holds at least a 25 percent ownership interest in a business.
The proposed rule supersedes all conflicting or inconsistent state laws or regulation. It would erase employee non-compete laws in at least 45 states which currently allow such restrictions if based on reasonable scope and duration. California already voids many non-competes, but the proposed FTC rule still could result in significant changes, including in relation to business sales.
The FTC’s publication of the Notice of Proposed Rulemaking is the first step in the FTC’s rulemaking process. It could take months, or even a year or more, for the proposed rule or some modified version of the rule to take effect. The rule is likely to face legal challenges from the business community that may further delay the process. The proposed rule allows for a 180-day compliance period for businesses after the final rule takes effect.
We will continue to monitor this issue and provide updates.
