New Year, New Rule: Are Non-Competes Out in 2023?

On Thursday, January 5, 2023, the Federal Trade Commission (“FTC”) announced a striking new proposed rule that would ban employers nationwide from using non-compete agreements with workers (the “Proposed Rule”). The FTC commissioners voted 3-1 in favor of the Proposed Rule.

The FTC will be accepting public comment on the rule for 60 days, after which it may make changes and issue a final rule. As drafted, the Proposed Rule would not only prohibit employers from entering or attempting to enter new non-compete agreements with workers, but it would also require employers to nullify existing non-competes within a certain time frame. Employers across all industries rely on non-competes for a variety of reasons, including, protection of equity invested in training employees, protection of employer goodwill, and to safeguard their business’s competitive edge. As such, to say the Proposed Rule has incredibly broad implications is an understatement – especially for industries that heavily utilize non-competes, such as healthcare and sales.

The agency called such measures that prevent employees from going to work for other companies in the same field for a certain length of time “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses,” and an unfair method of competition in violation of the law.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. The FTC estimates that the Proposed Rule “could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”

While the agency may view those changes positively, if the Proposed Rule is adopted, it will require employers to make seismic shifts in their business practices, including: quickly modifying employee on-boarding documents, modifying existing employment agreements, and developing creative solutions to attract and retain talent, and to protect proprietary business information. 

Importantly, while the Proposed Rule—if adopted—would not limit employers from issuing non-disclosure and non-solicitation agreements, it will be important for employers to review the language of any restrictive covenant to ensure it is not drafted so broadly as to run afoul of the rule. Similarly, employers will need to ensure appropriate mechanisms they may use, which are not impacted by the Proposed Rule, are implemented or remain in place – including applicable trade secret and confidentiality agreements, and policies to protect valuable business investments.

The Proposed Rule exempts individuals who hold at least a 25 percent ownership interest in a business entity who enter into a non-compete agreement as part of the sale of the business in which they have an ownership interest. How this exemption applies to different types of business entities remains to be seen. It is also possible more exemptions may be added following public comment.

Like other recent sweeping administrative policy changes, the Proposed Rule is likely to face significant legal challenges regarding the FTC’s authority to implement it. Employers should, therefore, stay tuned for new developments. However, in recent years, many states have already enacted legislation limiting employers’ ability to enforce restrictive covenants.

Therefore, now is the time to review your employment agreements and begin brainstorming how your business would respond to adoption of the Proposed Rule. For more information on the Proposed Rule, or how to make your company’s position known to the FTC during the 60-day public comment period, reach out to one of the experienced employment attorneys at Dilworth Paxson LLP. Dilworth anticipates providing comment and will seek client input in developing a productive framework to address the business considerations of the employers when it comes to non-competes.

For Further Information:

If you have questions about this Alert or actions your business should take concerning independent contractors and worker classification, please contact Marjorie Obod, Jennifer Snyder, Katherine Enright, Benjamin Teris or any other member of our Labor & Employment Group.