by Kim Wiseman, Human Resources Business Partner Consultant
In his state of the union speech on February 7, 2023, President Biden referred to an Executive Order he signed in July of 2021 asking the FTC “to address agreements that may unduly limit workers ability to change jobs” and to “curtail the unfair use of non-compete clauses or other clauses or agreements that may unfairly limit worker mobility.”
In January 2023, the FTC proposed a Non-Compete Rule that, if implemented, would ban most non-compete clauses nationwide, superseding state laws. The proposed act would prohibit “unfair methods of competition” if it:
- Enters or attempts to enter a prohibited non-compete clause with an employee,
- Maintains an existing prohibited non-compete clause, or
- Represents than an employee is subject to a non-compete without a good -faith cause that the non-compete is lawful.
As drafted, the rule would apply to almost all employers and workers, covering both employees and independent contractors.
If adopted, the rule would require employers to inform any employee subject to a prohibited non-compete that it is rescinded within 180 days from the effective date of the ruling.
The FTC claims that non-compete clauses prevent workers from pursuing better jobs, higher pay, or improved working conditions.
The Non-Compete Rule is proposed to have four restrictions:
- Employers that are exempt from the FTC Act. Certain banks, savings and loan institutions, federal credit unions, air carriers, livestock related business, and non-profits will be exempt from the Non-Compete Rule.
- State or local governments and government-affiliated private entities.
- Non-compete clauses between a buyer and seller of a business, where the person selling the business is a “substantial” owner. “Substantial” is defined to mean a person holding at least a 20% ownership interest in the target business.
- Non-compete agreements between franchisors and franchisees that restrict franchisees.
Unlike many state laws, which include exceptions for highly compensated, executive and managerial employees, the proposed ban contains no exemptions for high-level employees or those with unique, specializes skills or knowledge.
As drafted, the “definition of a non-compete clause would generally not include other types of restrictive employment covenants – such as NDA’s and client or customer non-solicitation agreements.” Although, if a customer’s non-solicitation agreement applies to a sales employee that sell into a downstream market with very few customers, this could be argued that a customer non-solicit is a de facto non-compete.
The FTC has opened the 60-day public comment period which ends March 20, 2023. From there they will review and address comments before adopting the final rule. The Non-Compete Rule’s prohibitions are slated to take effect 180 days after the publishing of the final rule, meaning at the conclusion of the 180 days companies must have released workers from existing non-competes and would be prohibited from entering into new non-competes. Employers will have at least eight months – and potentially longer – before needing to make changes to non-compete clauses. Given the fact that there will almost certainly be immediate challenges to the FTC’s rulemaking authority and the possibility of a change in administration in 2024, the FTC could choose to withdraw or not issue a final rule.
What is next?
The FTC has opened the 60-day public comment period which ends March 20, 2023. You may submit comments using the following link: https://www.regulations.gov/docket/FTC-2023-0007/document
Unsure what this means for your business? Contact McCloskey Partners, LLC to discuss your company’s needs 215-716-3035 x 709 or kim@mccloskeypartners.com