January 5, 2023

Today, the U.S. Federal Trade Commission (FTC) released the text of a soon-to-be published proposed rule banning non-compete clauses in employment contracts that is expected to impact 1 in 5 U.S. workers—or 30 million Americans. The proposal makes it an unfair method of competition under the Federal Trade Commission Act for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain a non-compete clause with a worker; or, to represent to a worker that he or she is subject to a non-compete clause. Employers would also have to rescind any existing non-competes within six months of the final rule taking effect and affirmatively communicate to current and former workers that their non-competes are no longer valid. This ban on non-competes would extend to both employees and independent contractors. The FTC’s proposal does contain an exemption for non-competes preventing an owner or partner selling a business from immediately re-entering the field. 

In the proposed rule, the FTC defines a prohibited 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.” But whether a contractual provision is a non-compete clause would depend “not on what the provision is called, but how the provision functions.”  The FTC says that “other types of restrictive employment covenants—such as non-disclosure agreements (‘NDAs’) and client or customer non-solicitation agreements will generally not be deemed non-competes” because they usually “do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” But the FTC proposal cautions that “under the proposed definition of ‘non-compete clause,’ such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”

Among the issues on which the proposal specifically requests comments are: (1) Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and (2) Whether low- and high-wage workers should be treated differently under the rule.

The proposal will be open for comments for 60 days after it publishes in the Federal Register.

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