FTC Proposes Rule to Ban Noncompete Agreements

On Jan. 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule that would ban noncompete clauses in employment agreements. In making its historic announcement, the agency alleges that noncompete agreements harm competition; suppress wages for workers, including those not subjected to noncompete clauses; reduce labor mobility; and hamper innovation. According to the FTC, if the proposed rule becomes final, it could increase employee wages by approximately $300 billion per year and expand career opportunities for 30 million American workers.

What Will the Proposed Rule Address? 

The agency’s proposed rule is based on a preliminary finding that noncompete clauses constitute unfair competition and, therefore, violate Section 5 of the Federal Trade Commission Act.

The proposed rule would generally prevent employers from taking the following actions:

  • Entering or attempting to enter into noncompete agreements with employees
  • Maintaining noncompete agreements with employees
  • Representing to employees, under certain circumstances, that they are subject to a non-compete agreement

The proposed rule includes a limited exception for noncompete clauses between a seller and buyer of a business. Additionally, while nondisclosure and non-solicitation agreements are generally excluded from the definition of a noncompete clause, the FTC leaves open the possibility that such agreements may be deemed de facto noncompetes if broadly written. The potential that a non-solicitation agreement may be determined by a court to be a de facto non-compete is likely to be the most problematic aspect of the proposed rule for IT & engineering staffing and solutions firms.

The agency’s proposed rule would apply to both employees and independent contractors. If the rule becomes final, employers would be required to nullify existing noncompete agreements within six months of the publication of the final rule.

What’s Next? 

Once the proposed rule is published in the Federal Register, there will be 60 days for public comment. Subsequently, the agency will review comments and determine whether to move forward with a final rule and if promulgated, what, if any, modifications should be made in the final rule.

Even after the FTC completes the notice and comment period, it would likely be some time before this proposed rule becomes final, as the agency’s rule wil be challenged by employers, employer groups and associations who use noncompete agreements. These challenges will include whether the FTC even has authority to issue such a rule. While the FTC undertakes rule-making, noncompete agreements between employers and employees will remain valid to extent compliant with state law. However, owners and executives of IT & engineering staffing firms who utilize restrictive convenants including non-soliciation agreements will want to follow the agency’s rule-making process closely. TechServe will keep members apprised of key developments of the process.