Friday, January 6, 2023

FTC to ban most noncompetes

Boy, that escalated quickly! On Wednesday, the Federal Trade Commission (FTC) issued a news release on its first lawsuits to halt enforcement of allegedly unlawful noncompetes. Yesterday, the FTC announced that it plans to ban (almost) all noncompetes

You can read the proposed rule here. Some points of interest:

  • Whether a contract is covered by the prohibition hinges on a "functional test" that looks at whether a contract clause "has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer."
  • The definition of noncompete generally does not include non-disclosure agreements, non-solicitation agreements, or training reimbursement agreements - but they might be banned if they meet the functional test above);
  • The noncompete prohibition would apply to "workers," defined broadly to include employees, volunteers, inters, independent contractors, etc.;
  • Employers must rescind existing noncompetes, including notice to the employee (or covered former employee) that the noncompete is "no longer in effect and may not be enforced." This must be done in writing (paper or electronic), and the rule includes model language;
  • The rule does not apply to noncompetes entered into by a person selling all or substantially all of a business entity or its operating assets. 
Don't panic yet! This is just a proposed rule and it will be a little while before a final rule is published, if at all. It will almost certainly afford employees some time period in which to come into compliance. That said, employers may want to think long and hard about shelling out a bunch of money to entice an employee into signing a noncompete that may be invalid in a few months.  

If you're a real glutton for punishment, you can read the full Non-Compete Clause Rule Notice of Proposed Rulemaking here

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