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New FTC Proposed Rule Threatens to Ban Employee Noncompete Agreements

February 1, 2023

Rule would also retroactively ban existing noncompete agreements

New FTC Proposed Rule Threatens to Ban Employee Noncompete Agreements

The Federal Trade Commission (FTC) has proposed a new rule that would effectively ban noncompete contracts in the workplace. If the rule is finalized, it will mean all existing noncompete agreements would be canceled and local and state laws on noncompete agreements would no longer apply. A noncompete agreement is a contract between an employer and employee that prevents the employee from working for a competing business for a certain period after their employment has ended. These agreements, under current law, are governed by states and typically require that noncomplete clauses are reasonable based on geographic scope, duration, and restrictions on worker activity. The FTC’s proposed rule ignores reasonable restrictions that benefit employers in favor of a wholesale ban and would remove state authority to regulate these agreements by placing that authority solely with the federal government. The rule would make it illegal for an employer to enter into or maintain a noncompete agreement or represent to an employee that they are subject to a noncompete agreement without a good faith basis. The rule would retroactively apply to noncompete clauses that workers are currently bound by and would also require employers to notify workers that such agreements are no longer enforceable, regardless of whether the worker is an employee or an independent contractor. In a public statement released with the proposed rule, FTC chair Lina Khan explained the proposed rule arguing noncompete agreements are an “unfair method of competition” and therefore violate Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” “This FTC proposal, if finalized, will almost certainly be subject to legal challenge,” said Beth Milito, Executive Director of the NFIB Small Business Legal Center. “Since, until recently the FTC had not sought to challenge any non-compete agreements and it is not at all clear that Congress intended the FTC to have this authority.” The public has until March 20 to submit comments on the proposed rule to the FTC, and can do it here. After that date, the FTC may issue a final rule, which could take effect as soon as 60 days later. Employers would then have 180 days to comply with the new rule.

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