In January of this year, the Federal Trade Commission (“FTC”) announced a Proposed Rule to ban employers from using non-compete agreements with their employees. The Proposed Rule, however, has not actually become law yet. Given the volume of comments the FTC received regarding the Proposed Rule, the FTC is not expected to vote on the final version of the Proposed Rule until April 2024. If the Proposed Rule does become law, there are significant impacts and implications for how employers interact and contract with their employees.
Definition of Non-Compete
The FTC’s proposed Rule defines 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 Proposed Rule also contains a functional test to weed out contractual terms that may not be labeled as non-competes but are operationally equivalent. Examples the FTC provides are the following types of contractual terms, which the FTC could consider as functionally noncompete clauses:
- 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.
- 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 specific time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
If the Rule were to go into effect, employers would be wise to ensure their non-disclosure agreements and other provisions are not so broad as to be construed as a non-compete clause.
Effects of the Proposed Rule
The obvious effect of the Rule would be that employers cannot use non-competes going forward. The proposed rule goes much further, however, and would require employers to terminate existing non-competes and make their employees aware that the non-competes are no longer in effect. Employers would be required to do this regardless of whether an employee received something in exchange for the non-compete provision, such as an increase in base compensation or incentive compensation. As the rule is currently written, the employee could potentially keep these benefits even while the non-compete agreement was no longer in effect.
The Rule would also extend beyond employees. It would apply to independent contractors as well as interns, paid or unpaid. It would essentially apply to any individual that works for the employer.
The Rule would generally not apply to non-profits, banks, federal credit unions, lending institutions, common carriers, and air carriers. This is because Section 5 of the FTC Act does not apply to these industries.
The Rule would also affect the way employers can protect their intellectual property, including their trade secrets. While employers can still rely on confidentiality, non-disclosure, and non-solicitation agreements, these agreements would need to be narrowly drafted in a way to avoid being viewed as a de facto non-compete agreement.
Current Status of the Rule
For what it’s worth, the Proposed Rule may or may not actually go into effect. Employers should still be aware, however, of the potential impacts of the Proposed Rule.
For a consultation with one of our Business Representation attorneys regarding your non-compete, non-disclosure, and non-solicitation agreements, call 703-535-7809 or email email@example.com.
*This blog is not intended to be legal advice and is for informational purposes only. Past results do not guarantee future outcomes. Should you have questions regarding the Proposed Rule or other employment law matters, you should consult with an attorney.