On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would essentially prohibit noncompete contracts in the workplace, rescind all existing noncompete agreements, and preempt all local and state laws on noncompete agreements.
NFIB will be commenting on this proposed rule and encourages concerned business owners to do the same. Comments can be submitted here.
What is a noncompete agreement?
Noncompete agreements are used by many industries and businesses to protect intellectual property of company. For instance, a noncompete would prevent former employees from disclosing trade secrets or customer lists to an employer’s competitor. The agreements generally specify that an employee is barred from working for a competing business for a specified period after employment has concluded.
What would the proposed rule do?
The proposed rule would make it unlawful for an employer to:
- Enter into or attempt to enter into a noncompete agreement with a worker.
- Maintain a noncompete agreement with a worker.
- Represent to a worker that the worker is subject to a noncompete agreement without a good faith basis to believe that the worker is subject to an enforceable noncompete.
FTC’s chair, Lina Khan, claims as authority Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” Chair Khan indicated that the FTC has preliminarily determined that noncompete agreements constitute an “unfair method of competition” and therefore violate Section 5.
The rule would retroactively apply to noncompete clauses that workers may currently be bound by and would also require that employers notify workers that such agreements are no longer enforceable.
It would broadly cover workers who are employees and independent contractors.
Exceptions
The FTC offers virtually no exceptions to the new rule. However, the rule would not apply to a person selling a business entity or otherwise disposing of the person’s ownership interest in the business entity.
The Next Steps
The public can submit comments to the FTC concerning the proposed rule through March 20, 2023. After this date, the FTC may issue a final rule. The rule would then take place after 60 days, and employers would have 180 days following the enactment to comply.
For any additional questions and information you can reach out to [email protected].
