Non-competition agreements (i.e., “non-competes”) present one of the few areas of employment law where employers have mixed emotions, largely depending on what’s at stake and which party desires to enforce the restriction. But regardless of whether you love or hate them, a future without non-competes is on the horizon.
Earlier this month, the Federal Trade Commission (FTC) proposed a new rule that will prevent all employers from entering into non-compete clauses with any workers going forward, and also requires employers to rescind existing non-compete clauses, or risk engaging in “unfair method[s] of competition,” in violation of the Federal Trade Commission Act (FTCA).
All Employers. The FTC’s proposed ban on non-compete agreements applies to all U.S. employers, regardless of industry or status as a federal government contractor. The proposed rule makes a narrow exception for non-compete clauses agreed to by a person who is selling a business or substantially all of the person’s ownership interest in the business. However, this exception only applies where the party subject to the restriction is also an owner/member/
partner in the company being sold or acquired. Which means that in the case of an acquisition or merger, a purchasing company can still require the selling company’s owners to agree not to compete with the purchaser as part of the sale.
All Workers. Per the FTC’s proposed rule, the definition of “workers” includes independent contractors, interns, volunteers, apprentices, and sole proprietors. This is a much broader coverage than many statewide bans on non-compete agreements, which have historically applied only to (W-2) employees, and/or have exceptions for high-level executives or employees earning more than a certain salary threshold (like Virginia, where non-competes are largely prohibited for “low-wage workers” who earn less than $58,000 per year).
All Contracts. The proposed rule requires employers to rescind existing noncompete clauses and to inform an affected employee on an individual basis that such a clause is no longer binding and that their agreement not to compete is not enforceable. This means that current non-competes would not be “grandfathered” in. The FTC places the burden on the employer to proactively notify employees who are currently subject to non-compete clauses, although the proposed rule does not specify to what lengths employers must go to locate and notify former employees.
The earliest the proposed rule could go into effect is September 3, 2023, 240 days after the FTC published the proposed rule in the Federal Register. Clearly there are significant business interests that will push back against this proposed rule during the comment period.
A world without non-competes may seem daunting to employers who are nervous about how to prevent the loss of proprietary information. However, even if non-compete agreements become a thing of the past, alternate legal protections exist that can also address employers’ concerns about confidentiality and trade secrets.
For more information on how to protect your company’s interests, or regarding this or any employment matter, please contact Sara Tandy or any other Reaves GovCon attorney. We are happy to help.