Proposed Federal Law Could Ban Non-Competes
- January 17, 2023
The Federal Trade Commission (FTC) has proposed a rule that would ban all non-competes with very limited exceptions. If approved, 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. This rule would also nullify current non-competes and require employers to notify employees that existing non-compete agreements are no longer in effect. The rule would cover agreements with any worker, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer.
However, there are exceptions to the proposed rule. A non-compete may be enforced against a “substantial” owner or member who sells all or part of their ownership interest. To be classified as “substantial” the seller must hold at least a 25 percent ownership interest in the business.
The proposed rule will supersede all conflicting or inconsistent state laws. However, states could still impose requirements and restrictions with respect to non-compete clauses if they afford greater “protections” than those provided by the proposed rule. It is important to note that currently in California non-competes are generally unenforceable.
There is no distinct timeline for this rule to go into effect as legal challenges will likely delay its implementation. Nevertheless, once the final rule goes into effect businesses will be given a 180-day compliance period.
The FTC seems to have been encouraged to act by President Biden’s Executive Order on Promoting Competition in the American Economy issued July 9th, 2021. The order was issued to promote economic mobility, stating “The American promise of a broad and sustained prosperity depends on an open and competitive economy.”