FTC Proposes Ban on Employee Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule[1] to prohibit employers from enforcing non-compete agreements against former employees, contractors, and other workers. The proposed rule defines “non-compete clause” broadly as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.”

Further, the rule prohibits broad non-disclosure agreements that “effectively preclude[] the worker from working in the same field” after separation. Notably, this rule does not prohibit agreements restricting outside work by employees during the term of their work for the employer. The rule also provides an exception for enforcement of non-compete agreements related to the sale of a business (or sale of such person’s ownership interest in a business) when the person restricted by the agreement is a “substantial owner [owning at least 25 percent of] … the business entity at the time the person enters into the non-compete clause.”

In addition to prohibiting enforcement of non-compete agreements, the proposed rule also imposes an obligation on employers to notify all employees subject to non-compete agreements that such contract is no longer in effect and may not be enforced.

The next steps for this proposed rule will be completion of a 60-day comment period, then the FTC will publish a final rule that will go into effect 180 days after publication. As with other recent federal agency rulemaking, this regulation is very likely to face legal challenges that may further delay or prevent enforcement.

We will continue to monitor this proposed rule and provide updates on progress and any significant legal challenges along the way. If you have any questions please feel free to contact your Dinsmore employment attorney.

UPDATE: The FTC reportedly received over 27,000 comments from the public on this proposed rule and is expected to put this matter to a vote in April of 2024. Based on the proposed rule’s enforcement timeline, it is anticipated that the earliest these new restrictions may go into effect is October of 2024.