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FTC Proposes New Rule to Ban Use Of Non-Compete Agreements With Workers

Non-Compete Agreement Copy of Featured Images-13 - Buelow Vetter Buikema Olson & Vliet

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would ban employers from entering into or enforcing existing non-compete agreements with “workers.”  This is not limited to only paid employees, but also to any “natural person who works, whether paid or unpaid, for an employer,” which includes an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides services to a client.  The FTC’s rule would serve as a near complete ban on non-compete clauses.

What Does the Proposed FTC Rule State?

Specifically, the proposed rule states:

(a) Unfair methods of competition. It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clauseor represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

The proposed rule would have retroactive effect.  It provides that employers must also rescind any non-compete clauses that they have entered into by 180 days after the date of publication of the final rule.   The employer must provide notice to any current worker, and any former workers, within 45 days of rescinding the non-compete clause.

The proposed rule contains a narrow exception for a person who is selling a business entity or ownership interest in a business entity, or all of a business entity’s operating assets where the individual restricted by a non-compete was a substantial owner, member or partner in the business entity at the time the person entered into the non-compete clause.

The proposed rule will supersede any State statute or regulation that is inconsistent with the rule, unless the statute or regulation provides greater protection for the worker.

When Would This Rule Be Implemented?

The FTC has invited the public to submit comments on this proposed rule, through March 10, 2023.  After receiving the comments, the FTC will make any changes and then publish the final rule.

However, the implementation of the final rule may be delayed, as we are likely to see legal challenges as to whether the FTC has authority to issue this rule.  In fact, Commissioner Christine S. Wilson, issued a dissenting statement outlining what she believes will be the legal challenges, including whether the FTC has authority for competition rulemaking.  The FTC maintains non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.  Therefore, the FTC maintains it has authority to regulate non-competes under the 1914 law, which gives the government the power to prevent unfair methods of competition and investigate unfair or deceptive acts that affect commerce.

What Should Employers Do Now? 

An employer may want to consider whether to submit a comment to the FTC prior to the March 10, 2023 deadline.  Notably, the proposed rule would generally not affect confidentiality, non-disclosure and non-solicitation agreements (unless they are so broad as to function as a non-compete).  Therefore, employers should also identify any existing agreements they have in place, and contact your Buelow Vetter Buikema Olson & Vliet attorneys to ensure you have enforceable confidentiality and non-solicitation agreements.

If you have any questions or concerns regarding the FTC’s proposal to ban the use of non-compete agreements, please contact Christina A. Katt at ckatt@buelowvetter.com or your Buelow Vetter Attorney.

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